Wall Street Comes to Washington

June 18, 2003

Washington, DC

Bruce GordonSenior Vice President

Moody’s Investors Service

Center for Studying Health System Center for Studying Health System Change Change

-2-

Aa

a

Aa

1

Aa

2

Aa

3

A1

A2

A3

Ba

a1

Ba

a2

Ba

a3

Ba

1

Ba

2

Ba

3

B1

B2

B3

Ca

a1

Ca

a2

Ca

a3

Ca C

0%2%4%6%8%

10%12%14%16%18%20%

Moody’s Healthcare Rating Distribution Moody’s Healthcare Rating Distribution Is Skewed Toward Lower Ratings Than Is Skewed Toward Lower Ratings Than Public Finance Ratings OverallPublic Finance Ratings Overall

All Public Finance Ratings

Health Care Ratings

•Excludes Credit Enhanced Ratings

-3-

Moody’s Not-For-Profit Moody’s Not-For-Profit Healthcare OutlookHealthcare Outlook

“We believe not-for-profit hospitals will

maintain overall stable credit quality over the course of 2003 . . . However, we also expect the industry to face strong pressure in 2004 and beyond . . .”

January 2003

-4-

• Hospital utilization will continue to grow.

• Commercial rate reimbursement holding firm.

• Medicare reimbursement reasonable by historical standards.

• Hospitals adding new clinical services.

• Decline in M&A activity enhancing ratings.

Factors Supporting Moody’s Stable Outlook

-5-

Industry Developments That Continue to Industry Developments That Continue to Pose Credit RisksPose Credit Risks

• Federal budget deficits could pressure Medicare • State budget deficits already impacting Medicaid • Commercial rate increases probably peaking• Increase in operating expenses• Large capital needs remain• Stock market unpredictable• Future bio-terrorism activity would increase

expenditures• Physicians and niche providers skimming cream

-6-

0

20

40

60

80

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Number of Changes

Upgrades Downgrades

Moody’s NFP Hospital Rating ChangesMoody’s NFP Hospital Rating Changes

-7-

Ratio of Downgrades to Upgrades: Ratio of Downgrades to Upgrades: Six Months 2002 and 2003Six Months 2002 and 2003

1.0

1.5

2.0

2.5

3.0

3.5

4.02002 2003*

Ratio*through 6/10/03

-8-

Reasons for DowngradesReasons for Downgrades

Mergers and acquisitions Non-core operations Construction-related dislocation Capitation Management/physician turnover Merger dissolution

Strategic:

-9-

Reasons for Downgrades Reasons for Downgrades

Large Medicaid and indigent mix Nursing and other staff shortages Unfavorable demographics High governmental payer mix Competition High managed care payer mix Union actions

Local Market:

-10-

Reasons for DowngradesReasons for Downgrades

Malpractice expense Pension expense/funding Stock market losses Incremental debt A/R, contractual, collection problems

Financial:

-11-

Reasons for UpgradesReasons for Upgrades

Improved reimbursement contracting (S) (F)Patient volume increases (S) (L)Increased market share (S) (L)Divestiture of unprofitable ops (S)Digestion of mergers (S)

-12-

Reasons for UpgradesReasons for Upgrades

Good demographics/pop. growth (L)Exclusive services/specialty provider

(S)Sole community provider (L)Cost cutting initiatives (S)Acquisition by higher-rated entity (S)