SAN FRANCISCO--(BUSINESS WIRE)--
Fitch Ratings affirms the 'A-' long-term rating on MetroHealth's
outstanding debt issued through County of Cuyahoga, Ohio:
--$17.6 million series 1997;
--$71.7 million series 2005;
--$75 million series 2009B.
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by a gross revenue pledge.
KEY RATING DRIVERS
IMPROVED OPERATING PERFORMANCE: The revision in the outlook to Stable
from Negative reflects the improved operating performance in fiscal 2013
(draft audit, Dec. 31 year end) and through the four months ended April
30, 2014. MetroHealth has benefited from Medicaid expansion and was able
to capitalize on this one year earlier through a Medicaid waiver program
(MetroHealth Care Plus). This program enrolled approximately 30,000
uninsured patients into Care Plus and the majority were existing
patients for MetroHealth. In addition, all of these patients were
successfully transitioned to traditional Medicaid in 2014. MetroHealth
exceeded its fiscal 2013 operating income budget and expects to exceed
its fiscal 2014 budget.
NEW LEADERSHIP TEAM: Since Fitch's initial rating in 2010, there has
been management turnover and a new team has been in place for about a
year. Fitch expects management stability especially as the organization
is in need of a rebuild of its main campus.
DEMONSTRATED ABILITY TO MANAGE CHALLENGING PAYOR MIX: MetroHealth has a
solid market position and plays an integral role as a provider of safety
net services in the county. Because of its safety net role, it has an
unfavorable payor mix with a high percentage of Medicaid and self-pay
payors. Despite this, MetroHealth has demonstrated the ability to
produce profitable operations and management attributes this success to
its longstanding electronic medical record (Epic), closed medical staff,
and care management processes. MetroHealth also has a good relationship
with the county and receives an annual appropriation of approximately
$36-40 million a year.
MAJOR CAPITAL NEEDS AHEAD: MetroHealth always had the need to address
its aging plant; however, these plans have been accelerated due to
facility issues during the most recent winter storms. The details of the
master facility plan's cost and funding sources are still to be
determined but management expects the majority to be funded from outside
funding sources. Fitch will evaluate the impact of the master facility
plan on the rating when details are finalized. MetroHealth has continued
with its ongoing ambulatory expansion strategy with the opening of a
multi-specialty ambulatory facility in the Cleveland suburb of
Middleburg Heights in July 2013 and volume has exceeded original
projections. MetroHealth's capital budget is approximately $40 million a
year (1.3x depreciation expense).
MANAGEABLE DEBT BURDEN: MetroHealth's debt burden is manageable and its
debt service is front loaded and declines after 2018. Sustained solid
operating cash flow could result in some additional debt capacity at the
current rating level.
SUSTAINED OPERATING PERFORMANCE: Fitch expects MetroHealth to sustain
its improved operating performance and to maintain ratios in line for
its rating level.
FUTURE CAPITAL NEEDS: Fitch will assess the impact of the master
facility plan on MetroHealth's rating when plans are finalized and
currently no additional debt is being contemplated.
MetroHealth is a political subdivision of Cuyahoga County and the system
provides a comprehensive range of services that include a Level I trauma
center, Level II pediatric trauma center, Level III neonatal intensive
care unit, and regional burn unit. The main facility is MetroHealth
Medical Center located in Cleveland, Ohio that operates 545 beds. Total
revenue in fiscal 2013 (draft audit) was $849 million.
Improved Operating Performance
MetroHealth's operating performance improved since our last review and
Fitch expects profitability to be more consistent especially due to the
benefit from Medicaid expansion. In fiscal 2013, MetroHealth had a $13.4
million operating income (1.6% operating margin) compared to $5.6
million (0.7% operating margin) the prior year. The improved performance
was mainly driven by the Care Plus program, which brought in an
additional $70 million of federal dollars for expanded coverage for
previously uninsured patients. In fiscal 2013, MetroHealth's self-pay as
a percentage of gross revenues declined to 9.7% from 17.3% the prior
Through the four months ended April 30, 2014, operating performance has
continued to improve with a 2.3% operating margin mainly due to the
successful transition of the Care Plus population into Medicaid as well
as significant managed care rate increases that went into effect in
2014. Management expects to exceed its fiscal 2014 operating income
budget of $13.2 million (1.5% operating margin).
Strong Community Support
MetroHealth plays an integral role in the county as a safety net
provider with over 80% of its discharges originating from Cuyahoga
County (unlimited GO bonds rated 'AAA' by Fitch). Although the market is
competitive, MetroHealth's patient base is not competitive with the
other health systems in the market including University Hospitals Case
Medical Center (15.1% market share) and Cleveland Clinic (11.1% market
share). MetroHealth had 12.4% market share in 2012.
MetroHealth maintains strong community support with the consistent
receipt of county appropriations. The county appropriations have been
funded through two voter-approved health and human services tax levies.
Although these tax levies are not dedicated specifically to MetroHealth,
the system has always received a portion of the funds, which is
determined solely by the county. In addition, there is strong voter
support for the levies, which has passed in every election since 1980
with at least 53% support. The county appropriation has totaled
approximately $36 million the last two years and has been increased back
to $40 million a year for fiscal 2014 and 2015.
Given MetroHealth's importance to the county and the strong community
support, Fitch would expect some county funding for the new hospital
Challenging Payor Mix
MetroHealth's payor mix has improved with Medicaid expansion and as of
March 31, 2014, gross revenue by payor was Medicare (24%), Medicaid
(43.3%), managed care (22.4%) and self-pay (10.3%) compared to fiscal
2012 with Medicare (24.5%), Medicaid (33.3%), managed care (24.9%) and
MetroHealth's profitability is reliant on supplemental funding
(disproportionate share and UPL) and some of these funds are expected to
be reduced with the improved payor mix. Total Medicare and Medicaid
DSH/UPL was $67 million in fiscal 2012, $69 million in fiscal 2013 and
expected to be $45 million in fiscal 2014. The timing of the receipt of
these funds has recently lagged the year in which they accrue and has
MetroHealth's liquidity ratios are adequate for the rating level. Also
impacting liquidity in the interim period is an unusually high accounts
receivable balance due to the long payment period for the Care Plus
program. Management expects this to return to more normal levels by the
end of the fiscal year. As of April 30, 2014, MetroHealth had $287
million unrestricted cash and investments that equaled 130 days cash on
hand and 121.6% cash to debt compared to the A category medians of 196.3
and 129.2%. Including the expected 2013 UPL funding and Care Plus
accounts receivable, days cash on hand and cash to debt improve to 150
and 153%, respectively.
Planned Rebuild of Main Campus
MetroHealth's average age of plant is very high at 18 years, and a
rebuild of the facility has always needed to be addressed and a rebuild
of the facility is in the planning stages. During the recent winter
storms, the facility had some damage, however, there were no patient
safety issues. Management has engaged community support in the design of
the new facility and is working on securing funds for the project. Fitch
will assess the impact of the master facility plan on MetroHealth's
rating when details are finalized.
Manageable Debt Burden
Total outstanding debt was $246 million at Dec. 31, 2013 and was 71%
underlying fixed rate and 29% underlying variable rate debt. Its
variable rate exposure includes $72 million of variable rate demand
bonds (VRDBs) supported by a letter of credit from PNC bank, which
expires in December 2015 and $25 million of indexed floating rate direct
bank loan that has a mandatory put in December 2017. Unrestricted cash
to putable debt is strong at over 4x. MetroHealth has two floating to
fixed payor swaps and there are no current collateral posting
MetroHealth's debt burden is manageable with MADS accounting for 2.5% of
total revenue in fiscal 2013. MADS is $20.95 million (gross interest on
BABs) and occurs in 2018. Then debt service declines to $17 million
until 2028 when it reduces significantly to $13 million. Debt service
coverage is better with the improved cash flow with 2.8x coverage by
EBITDA in fiscal 2012, 3.2x in fiscal 2013 and 3.7x through the four
months ended April 30, 2014 compared to the A category median of 3.8x.
MetroHealth covenants to provide annual audited information within 180
days of fiscal year end and unaudited quarterly financial information
within 60 days of quarter end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Emily Wong, +1 415-732-5620
Fitch Ratings, Inc.
650 California St.
Francisco, CA 94108
Jennifer Kim, +1
Thein, +1 212-908-0674
Fogerty, +1 212-908-0526
Source: Fitch Ratings