HEALTH CARE

Creditworthiness of Organizations in Providing Health Care for Employees

Creditworthiness of Organizations in Providing Health Care for Employees

A credit rating is a measure of a health care organization's overall creditworthiness and financial stability. An organization's credit rating provides the public and other interested third parties with an independent evaluation of the organization's financial ability to primarily secure indebtedness for the short and long term and also provides solid evidence of the organization's perceived ability to service debt or lease payments (Fraser & Ormiston, 2001; Patinkin, 1956). A credit rating is typically provided by an independent third party that specializes in providing these ratings to the public and private investor communities. Some of the most recognized providers of credit ratings include Standard & Poor's, Moody's Investor Services, and Fitch. These firms are known rating agencies, whose primary business is providing these ratings to public and private companies. These rankings are noted by a three-letter format and range from AAA to BBB for companies considered investment grade, with companies rated below this range being termed speculative or “junk” investment grade. The credit rating is a key determinant of the organization's borrowing cost and is closely correlated with the interest rate it obtains from the public or private debt markets. A more highly rated organization receives a lower interest rate and a resulting lower annual or semiannual payment on its indebtedness. The converse relationship is true as well. An organization that receives a lower credit rating has a higher interest rate and overall cost of borrowing. As such, an organization with a higher credit rating has a higher debt capacity.

As the following chart indicates, each rating agency has its own format for a credit rating and provides the basis for comparing companies on the merits of their creditworthiness.

A rating agency also provides “outlooks” for an entity that offers guidance on what the next rating for the organization may be in the next ratings cycle. An outlook can be characterized by the rating agency as stable, negative, positive, or uncertain. Although ratings may be changed at any time, the change or addition of an outlook is an early indication to provide guidance to investors prior to a new review cycle. The credit-rating process is typically undertaken by an organization when they are considering issuing debt or maintaining an ongoing rating. Whereas a credit rating is provided by a third party, the cost for obtaining the rating is paid for by the organization. (Fraser & Ormiston, 2001)

A credit rating is determined on both quantitative and qualitative measures. From a quantitative perspective, an organization's credit rating is determined by a myriad of financial ratios and performance criteria. The financial ratios are measurements that capture a firm's liquidity, leverage, and operating performance and allow it to be compared with its industry peers. These ratios are typically calculated in a predetermined manner, and the building blocks of the credit rating are determined by how the organization falls within certain ranges that are developed for the credit ratings from AAA ...