New York, November 14, 2012 -- Moody's Investors Service affirms Good Samaritan Hospital's (GSH) B1 bond rating, affecting $60.9 million of Series 1991 fixed rate bonds outstanding issued through the California Health Facilities Financing Authority. The outlook is revised to stable from positive.
SUMMARY RATING RATIONALE: The rating affirmation reflects: 1) GSH's stronger balance sheet with continued de-leveraging and growth in unrestricted liquidity due to material investment gains and to sizable proceeds from the state provider fee program; and 2) the expectation that the continuation of the state provider fee program will support core operations, capital expenditures and debt service payments and enable GSH to preserve unrestricted liquidity over the near term. The revision of the outlook to stable from positive reflects increased operating losses in fiscal year (FY) 2012 (excluding net proceeds from the state provider fee program) largely due to material inpatient admissions declines across all payers.
*High-end tertiary hospital (operating revenue base of $260 million and Medicare case mix index of 1.90 in FY 2012) located in downtown Los Angeles, CA
*Significant beneficiary under the California provider fee program as a large Medi-Cal provider (Medi-Cal accounts for 22% of gross revenues); GSH has received a combined nearly $23 million of net proceeds under the initial phase (21-month program) and second phase (6-month program); under the third phase (30-month program) GSH expects to receive approximately $40 million through FYE 2014
*As of August 31, 2012, unrestricted cash and investments grew to a peak $104.6 million, equating to further improved 157 days cash on hand, 172% cash-to-direct debt and 146% cash-to-comprehensive debt; the increase is due in part to favorable investment gains and receipt of net state provider fee program proceeds
*Presence of $44 million of additional unrestricted cash (excluded from Moody's calculations) from a land sale which could provide a short-term source of liquidity for operations and debt service, but is expected to be spent on a large medical office building and outpatient pavilion project beginning in FY 2013
*Conservative debt structure with all fixed rate debt and no interest rate swaps outstanding; no new debt planned at this time
*Defined benefit pension plan frozen to new employees since 1998; funded ratio based on projected benefit obligation is 85% at FYE 2012
*Hospital meets structural seismic requirements through 2030
*Increased operating losses in FY 2012 due primarily to large inpatient admissions decline across all payers and also to increased write off payments under Medicare recovery auditor contractor (RAC) audit (-6.8% operating margin and -0.9% operating cash flow margin excluding net proceeds under state provider fee program;-2.7% and 2.6%, respectively, including $9.0 million of net provider fee proceeds)
*Continued volatility in volumes due to continued sluggish economic environment and patients deferring elective procedures due to high insurance deductibles and co-pays; total inpatient medical and surgical admissions were down 15.5% and emergency room visits were flat, while outpatient surgeries were up a favorable 12.3% in FY 2012
*A history of inconsistent and weak operating performance reflective of a challenging payer mix; high combined exposure to government (Medicare 40.5% and Medi-Cal 21.9% of gross revenues) and self pay (7.5% of gross revenues) in FY 2012; payer mix is an ongoing concern given continued federal and state budget deficits, expected downward pressure on reimbursement across all payers and sluggish economic conditions; Management anticipates GSH will be in a relatively neutral position when the Medi-Cal program transitions from per diem to APR-DRG-based inpatient reimbursement effective July 1, 2013
*Reliant on supplemental government disproportionate share funding; GSH received a total of $21.8 million of Medicare DSH payments in FY 2012. The hospital does not qualify for
Medi-Cal DSH funding
*Small and very competitive primary service area consisting of 14 general acute care hospitals in a 4.5 mile radius; larger service area includes over 20 hospitals including several large, well-regarded tertiary and quaternary health systems
*Challenging labor environment; GSH is currently in contract negotiations with California Nurses Association (CNA) and Service Employees International Union (SEIU)
*Very high average age of plant (27 years) due to deferred capital needs; the hospital is currently in compliance with structural requirements but nonstructural requirements still need to be met under state seismic standards by 2030 deadline
The revision of the outlook to stable from positive reflects increased operating losses in FY 2012 (excluding net proceeds from the state provider fee program) largely due to large inpatient admissions declines across all payers,. The continuation of the California state provider fee program for an additional 30 months, together with GSH's improved cash balances, supports the stable outlook at the current rating level.
WHAT COULD MAKE THE RATING GO UP
Growth and stability of volume and revenues; improved operating performance and ability to sustain improved levels for multiple years; improved liquidity and debt coverage measures
WHAT COULD MAKE THE RATING GO DOWN
Decline in operating performance and larger operating losses; decline in unrestricted liquidity; weakening of debt coverage and liquidity measures; cuts in reimbursement
PRINCIPAL RATING METHODOLOGY
The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Deepa Patel Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Bradley E. Spielman Vice President - Senior Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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