Fitch Downgrades Einstein Healthcare Revs to 'BBB+'; Outlook Stable

Fitch Downgrades Einstein Healthcare Revs to 'BBB+'; Outlook Stable | Bild: © ad-hoc-news

--$133 million Pennsylvania Economic Development Financing Authority health system revenue bonds, series 2009A.

The Rating Outlook is revised to Stable from Negative.

Additionally, Einstein Medical Center Montgomery (EMCM), an affiliate of EHN, has approximately $309.4 million of FHA insured mortgage revenue bonds, series 2010 outstanding. The FHA bonds are non-recourse to the EHN obligated group and are not rated by Fitch. In total, EHN system outstanding debt is $442 million and 100% fixed rate.

SECURITYThe bonds are secured by a gross revenue pledge, lien on property of the obligated group, and a debt service reserve fund.

KEY RATING DRIVERS

WEAKENED FINANCIAL PROFILE: The rating downgrade reflects declines in profitability and liquidity metrics that are more in line with a 'BBB' category credit. EHN's service area and current economic conditions continue to limit its profitability.NEW HOSPITAL ON TRACK: EHN is building a new hospital, EMCM, in the service area of Montgomery Hospital, which joined EHN in March 2011. Fitch views this strategy favorably as EHN should grow market share in a better payor mix environment, which will allow it to continue serving its current challenged service area. The new hospital construction is on time and within budget.DECLINING UTILIZATION TREND: For the third consecutive year inpatient admission figures have trended negatively due to unfavorable service area economic factors hindering patient usage. In addition, observation encounters have increased significantly, which limits profitability.HIGH MEDICAID LOAD: EHN has a very high Medicaid patient load, which accounted for approximately 35.1% of gross revenue through December 2011 and is reflective of EHN's challenging service area.

CREDIT PROFILE

ORGANIZATIONAL OVERVIEWEHN operates EMC - Philadelphia, a 509-bed tertiary teaching hospital in northern Philadelphia, and several other ambulatory and specialized facilities, including MossRehab, a nationally recognized inpatient rehabilitation hospital located in nearby Elkins Park. EHN's total operating revenue in fiscal 2011 was $931.5 million.

WEAKENED PROFITABILITYThe rating downgrade to 'BBB+' from 'A-' is primarily attributed to EHN's weakened profitability and liquidity. Since fiscal 2008, profitability has moderated to a 1.6% operating margin ($15.3 million in 2011 from 2.2% ($17.8 million in income) in 2008. The fiscal 2011 budget was exceeded primarily due to the receipt of funds from a Medicaid assessment program that totaled $18 million in fiscal 2011. Through the six months ended Dec. 31, 2011 (interim period), numerous challenges, including EHN's payor mix, the current economic condition, and the continued shift of inpatient admissions to a lower reimbursement observation status have had an impact on profitability. Operating margin declined to negative 1.7% for the interim period. EHN historically experiences increased volumes and profitability in the January to March time period and expects that to occur this year.

Management has implemented various cost reduction initiatives such as reductions in workforce, supply chain savings, revenue cycle enhancements, and implementing patient throughput initiatives.

Management projects at least breakeven performance for fiscal 2012. Despite these initiatives, Fitch believes EHN will continue to be challenged over the longer term given its service area, which highlights the importance of the successful execution of its growth strategy.

CHALLENGING SERVICE AREAServing a large portion of Philadelphia's indigent population, EHN's payor mix has a very high Medicaid load, which limits the organization's ability to generate solid profitability. Further, areas of the greater Philadelphia marketplace are still under economic pressure, which has negatively affected patient volume trends with individuals selecting to postpone or cancel certain elective procedures.

Through the six-month period (December 2011), patient volumes have declined slightly, as inpatient admissions, inpatient surgeries, and select outpatient procedures have all been below management's budgeted expectations. Lower reimbursed observation encounters have been above budgeted expectations.

MEDICAID ASSESSMENT PROGRAMEHN does receive enhanced reimbursement funding from the state as part of the Medicaid Assessment Program. In fiscal 2012, EHN expects to receive approximately $21 million based on its Medicaid population. Although the assessment is viewed favorably and generates additional revenue for EHN, the existence of the program underscores the weak service area characteristics and other associated challenges encountered serving such a population base. In addition, given state budgetary challenges, these funds are at risk of being reduced, and accordingly EHN has reserved $12 million in fiscal 2012 of which $6 million has been reserved through the six months ended Dec. 31, 2011.

SATISFACTORY LIQUIDITYAlthough liquidity measures have declined, they are satisfactory at the 'BBB+' rating level. At Dec. 31, 2011 EHN had $332.6 million in unrestricted cash and investments, which is down from fiscal 2011's total of $389.1 million. The main driver of the drop in liquidity was a sizeable pension contribution of $39 million in addition to $15.9 million of unrealized losses. EHN's balance sheet metrics of 123.9 days cash on hand and 73.6% cash to debt compare consistently against Fitch's 'BBB' medians of 128.6 days and 79.8%, respectively.

Fitch believes EHN's liquidity growth will be limited due to another expected pension contribution of $41.2 million in fiscal 2013 in addition to any demands on liquidity related to the new hospital. Expected pension contributions remain high due to a continued decrease in the discount rate.

NEW HOSPITALEHN has implemented a growth strategy to ensure its commitment to medical education and its role as a safety net provider in Philadelphia. EHN's market position has grown over the years as the organization is in process of building EMCM in a north Philadelphia suburb, which management expects to support further market share growth.

EMCM is expected to open in September 2012 and Montgomery Hospital will close inpatient services. According to management, there is a significant amount of outmigration from Montgomery's service area currently and EHN expects to capture this as a result of the increased depth of services that will be offered at EMCM.

EMCM is being financed by the non-recourse FHA debt previously mentioned in addition to support from EHN that could total $114 million. In addition, AEHN has various guarantees in place in the form of letters of credit and lease guarantees.

DEBT PROFILEMaximum annual debt service (MADS) of $39.3 million includes the non-recourse FHA debt and results in weak coverage for the rating level with 2.2x coverage by EBITDA and 1.5x coverage by operating EBITDA, compared to the respective 'BBB' category medians of 2.6x and 2.3x.

However, coverage on obligated group debt only is stronger and reflective of a light debt burden at the obligated group level. MADS represented 1.8% of revenues in 2011 and debt service coverage by EBITDA and operating EBITDA in 2011 were 5.2x and 3.7x.

STABLE RATING OUTLOOKThe Stable Outlook reflects Fitch's expectation that EHN will at least maintain its balance sheet metrics at current levels and continue to improve its profitability. Additionally, Fitch expects EHN to realize the benefits of its growth strategy, which should improve profitability over the long term.

DISCLOSUREEHN provides annual and quarterly disclosure to the MSRB's EMMA system. Overall, Fitch views EHN's disclosure favorably, which consists of a balance sheet and statement of profitability and loss, cash flow statement, and utilization information. Management was candid and timely in its responses to Fitch during the credit review process.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:'Revenue-Supported Rating Criteria', dated 20 June 2011.'Nonprofit Hospitals and Health Systems Rating Criteria', dated 12 August 2011.

Applicable Criteria and Related Research:Nonprofit Hospitals and Health Systems Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836Revenue-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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