The Rating Outlook is revised to Negative from Stable.
Bond payments are secured by a pledge of the gross revenues, a first lien mortgage, and a security interest in certain property of the obligated group.
KEY RATING DRIVERS
MATERIALLY WEAKENED PROFITABILITY: The rating downgrade is driven by the significant deterioration in operating performance due to a sharp decline in revenue. Operating EBITDA margin decreased to 3.1% in fiscal 2013 (unaudited;
DECLINING UTILIZATION: Inpatient and outpatient utilization decreased in fiscal 2013 and the interim period due to the combined negative impact of an ongoing investigation by the
ONGOING DOJ INVESTIGATION: The DOJ initiated an investigation of KDMC in 2011 for alleged violations of the False Claims Act related to KDMC's levels of cardiac stent and catheter procedures between 2006 and 2011. The DOJ alleges that KDMC's levels were high. KDMC denies the DOJ's allegations. No civil or criminal charges have been filed against KDMC.
SOLID LIQUIDITY METRICS: Liquidity metrics remain solid with 196.6 days cash on hand and 16.8x cushion ratio at
LEADING MARKET SHARE: KDMC's primary service area (PSA) market share decreased to 36.6% in fiscal 2012, however, KDMC continues to maintain a leading market share. The service area characteristics remain challenging.
STABILIZATION OF OPERATING PERFORMANCE: KDMC needs to demonstrate a stabilization of operating performance, including a reversal of the continued decline in revenue. The inability to stabilize operations will likely lead to further negative rating pressure.
RESOLUTION OF DOJ INVESTIGATION: Due to uncertainty surrounding the final outcome of the DOJ investigation and potential related settlement agreement, further negative rating action may be warranted if a related settlement has a material negative impact upon liquidity metrics.
MATERIALLY WEAKENED PROFITABILITY
Operating EBITDA margins averaged 10.2% between fiscal years 2010 and 2012, but declined to a weak 3.1% in fiscal 2013 and further deteriorated to negative 4.5% in the interim period. The decline is primarily due to decreased inpatient and outpatient utilization rates.
Management implemented a financial improvement plan in late fiscal 2013. Initiatives include revenue cycle, staffing productivity, supply chain, hospital service line and physician practice improvements. KDMC eliminated 150 FTEs in
Coverage metrics compressed in lock-step with the decrease in operating profitability. Maximum annual debt service (MADS) coverage by EBITDA decreased to 1.5x in fiscal 2013 and negative 0.3x in the interim period and is very weak relative to Fitch's 'A' category median of 3.8x. MADS coverage by EBITDA is expected to improve to 2.2x by fiscal year end based upon management's current projections.
The rating is currently maintained at the 'A' rating level despite the weak performance as Fitch believes KDMC will be able to demonstrate year over year operating improvement given its physician recruitment initiatives, solid market position and expense reduction initiatives. The failure to improve performance over the next two years will likely lead to further negative action.
Inpatient and outpatient utilization declined materially across the board in fiscal 2013 with decreases in inpatient admissions by 6.5%, total surgeries by 12.4% and cardiac catheterizations by 48.3%. Utilization continued to decline in the interim period. The compressed utilization is due to the negative impact of an ongoing DOJ investigation, national utilization trends and the effects of high deductible health plans.
ONGOING DOJ INVESTIGATION
The DOJ initiated an investigation of KDMC in 2011 for alleged violations of the False Claims Act. The government contends that the number of cardiac catheterization and stent procedures performed between 2006 and 2011 was high and indicates that unnecessary procedures were performed. KDMC denies the DOJ's allegations. The DOJ is focused on the activities of four cardiologists, two of whom are no longer at KDMC. There are currently no civil or criminal charges against KDMC.
SOLID LIQUIDITY METRICS
Unrestricted cash and investments equaled
LEADING MARKET SHARE
After consistently increasing between fiscal years 2006 and 2010, KDMC's leading primary service area market share decreased to 36.6% in fiscal 2012 from 39.5% in fiscal 2010. The service area remains challenging and is characterized by flat to declining population levels and low median household income levels relative to both state and national averages. These demographic characteristics are reflected in KDMC's high exposure to
KDMC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 45 days of the end of each quarter. Disclosure is provided through the
Additional information is available at 'www.fitchratings.com'.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Source: Fitch Ratings
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