New York, November 19, 2012 -- Moody's Investors Service has affirmed Union Hospital of Cecil County's (UHCC) A3 bond rating on approximately $33.7 million of outstanding rated debt issued by the Maryland Health and Higher Educational Facilities Authority. The outlook remains stable. This analysis incorporates the financial performance of the entire Affinity Health Alliance, Inc. and Subsidiaries (Affinity). UHCC represents approximately 79% of Affinity assets and 93% of Affinity operating revenues.
SUMMARY RATING RATIONALE
The affirmation of the A3 rating and stable rating outlook reflect Union Hospital's strong market position as the sole provider in Cecil County, continued good operating performance in fiscal year (FY) 2012, and adequate balance sheet ratios at the A3 rating level.
*Distinctly leading position as the sole provider in Cecil County, MD.
*Continued good operating results in FY 2012 (10.9% adjusted operating cash flow margin). Since FY 2011, UHCC has operated under the Total Patient Revenue (TPR) system, which provides a strong incentive to control the days of care and ancillary service consumption per admission, a goal of national health reform.
*Good balance sheet from a cash on hand perspective with 239 days cash on hand at fiscal year end (FYE) 2012.
*Manageable capital spending and no new money debt plans through FYE 2016.
*Limited debt equivalents as UHCC maintains a defined contribution pension plan, has modest operating leases, and does not have any interest rate derivatives.
*Somewhat leveraged Moody's adjusted debt ratios at the A3 rating level, 56% debt-to-total operating revenue, 4.5 times debt-to-cash flow, and 3.5 times maximum annual debt service (MADS) coverage.
*Small for an A rated hospital ($151 million total operating revenues and just over 6,300 inpatient admissions recorded in FY 2012). Similar to other small hospitals, UHCC relies on a small number of physicians for admissions, as the top ten admitting doctors account for approximately 51% of admissions.
*Medicaid represented a high 21.9% of gross revenues in FY 2012, although we note this is less of concern in rate-regulated Maryland than it would be other states.
*Aggressive investment allocation with unrestricted cash and investments allocated to approximately 21% cash, 69% equities, and 10% hedge funds at FYE 2012.
*Through FY 2012, UHCC recoded a fourth consecutive year of declining inpatient admissions, although we note this is less of a concern under TPR. In fact, the regulated revenue base of the hospital is now established prospectively as a product of revenue per admission and an assumed number of admissions for a given population (capitation); consequently, too much volume growth in any one year could be financially detrimental. Management notes favorable growth in observation cases and ambulatory services (total admissions, factoring in observation stays, increased 1.9% in FY 2012).
The stable rating outlook factors UHCC's strong market position as the sole provider in Cecil County, continued good operating performance in FY 2012, and good balance sheet ratios at the A3 rating level.
WHAT COULD MAKE THE RATING GO UP
Steady and significant increase in revenue base and cash flow growth leading to materially improved debt coverage ratios; maintenance of strong market share
WHAT COULD MAKE THE RATING GO DOWN
Reversion to weaker operating performance leading to weaker debt ratios; material market share loss; softer balance sheet ratios; unexpected increase in debt without commensurate increase in cash flow generation
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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