Moody’s Not-For-Profit Healthcare Outlook

Brad Spielman, Vice President

Healthcare Ratings Group

San Francisco, CA

(415) 713-3223

Brad Spielman, Vice President

Healthcare Ratings Group

San Francisco, CA

(415) 713-3223

We rate ~530 not-for-profit hospitals and healthcare

systems (~1,200 total hospitals)

– Approximately $113 billion of total rated debt

outstanding

– Stand-alone hospitals (as small as 2,000 admissions)

– Multi-state systems (with more than 400,000

admissions)

– Specialty hospitals

Not-for-profit healthcare median rating is A3

Moody’s Healthcare Portfolio

3

Moody’s Industry Outlook: 2008 - 2009

In September 2008, Moody’s reaffirmed the stable outlook on the U.S. Not-for-Profit Healthcare Industry:

Most hospitals and health systems continue to show resiliency in financial performance; Medicare rates for FY 2009 appear relatively favorable

However, substantially weaker economy in 2008 has created more challenging operating

environment

4

Weaker Economy Has Created Challenges

Higher charity care levels Employers discontinue coverage; more working poor

Increased bad debt expense Co-pay and higher deductible products

Softening inpatient volumes Patients self-regulate healthcare needs, postponing elective procedures

Fundraising may sufferRecent consumer and corporate wealth declines

Potential reductions in Medicaid funding Several state economies have weakened over the past year

Decline in unrestricted cash Market turmoil has lead to large losses

5

Hospitals are Reacting Quickly to Challenges

Productivity benchmarking regarding FTEs

Length of stay reductions

More aggressive upfront registration

Outsourcing of certain functions

Greater investment in IT; more rapid installation

6

Medicare Rates for FFY 2009 Relatively Favorable

3.6% increase for inpatient rates; 3.0% for outpatient

42 compliance measures for quality; down from 72 that were proposed, easing the burden

Non payment for “never-events” begins Oct 1st

Uncertainties surrounding “bundled payment” concept; testing begins in 2009 in four states

7

FY 2007 Medians: Down from FY 2006, Still Favorable to Years Following Balanced Budget Act of 1997

Ratio 2006 2007 1999

Operating Margin 2.3% 2.1% 0.51%

Operating Cash

Flow Margin

9.2% 9.0% 9.0%

MADS Coverage 3.9x 3.9x 3.04x

Days Cash on Hand 154.3 156.6 146.5

Cash-to-Debt 109.0% 110.9% 90.6%

Debt-to-Cash flow 3.6x 3.7x 4.07x

Debt-to-Cap. 38.9% 38.6% 37.8%

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How Is the Industry Doing?

Number & Percentage of Hospitals with Operating Profit

284

315311333329

77%81% 76%

69%

80%

0

100

200

300

400

2003 2004 2005 2006 2007

Num

ber

0%

25%

50%

75%

100%

Percentage

Compares favorably to 2000 when 57% of hospitals reported an operating profit

Compares favorably to 2000 when 57% of hospitals reported an operating profit

9

How Is the Industry Doing? Another Look

Percentage of Hospitals with Operating Improvement over the Prior Year Profit

64%

60%

44%

47%

40%

50%

60%

70%

2004 2005 2006 2007

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Looking Forward- Expect continued moderating in financial performance in FY 2008

- Competition for patients will continue; leading to softer patient volumes,

particularly ambulatory setting

- Medicare:

- Recovery Audit Contractor (RAC) initiative will increase pressure on

revenues

- Uncertainty regarding CMS “bundled payment” concept may pressure

performance

- Rates for FFY 2009 appear relatively favorable

- Cost reduction efforts will be key going forward

- Increased capital appetite as the population ages

11

Financing Trends

- High volume of issuance driven by replacement of Auction Rate

Products, and Insured Variable Rate Demand Bonds

- Uninsured Fixed Rate Bonds; issuers looking for greater

flexibility to issue bonds backed by only their own credit

- Variable Rate Demand Bonds backed by Letters of Credit or

Self Liquidity, driven in part by pre-existing swap portfolios

- Increased rating activity

- Market volatility require issuers to be nimble, flexible

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Appendix IRecent Rating Trends

13

Rating Activity Remains Favorable; Nearly Equal Downgrades to Upgrades

through June 2008

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 Jun-08

Upgrades Downgrades

14

Nearly Two Decades of Industry Shifts and Ratings Changes

Relative stability (pre-BBA)

Volatility post-BBA

Stabilization

Negative

Stabilization returns

Medicare PPS, TRA

15

Not-for-Profit Healthcare Ratings: More Spec Grade Than Other Muni Credits

0%

4%

8%

12%

16%About 10% (or 50) of Moody’s

ratings are below

Investment Grade

(544 Ratings; Excludes Credit Enhanced Ratings)

Unrated market of small healthcare

organizations: nearly all spec

grade

16

Not-for-Profit Hospital Ratings Distribution

0%

20%

40%

60%

80%

100%

Aaa Aa A Baa <Baa

PositiveStable

Negative

RUR-Down

Ratings Distribution (531 credits) Outlook

Distribution