|[January 31, 2014]
Fitch Affirms Einstein Healthcare (PA) Revs at 'BBB+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'BBB+' rating on the following
Pennsylvania Economic Development Financing Authority bonds issued on
behalf of Einstein Healthcare Network (EHN, formerly Albert Einstein
--$116.5 million health system revenue bonds, series 2009A.
The Rating Outlook is Stable.
Additionally, Einstein Medical Center Montgomery (EMCM), an affiliate of
EHN, has approximately $308.3 million of Federal Housing Administration
(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 had outstanding debt of approximately $424.8
million as of Dec. 31, 2013 (six-month interim period; unaudited).
The 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 PROFITABILITY METRICS: In fiscal 2013 (June 30; audited) EHN
recorded an operating loss of $26.7 million (negative 2.5% operating
margin and 4.4% operating EBITDA margin), exceeding a budgeted shortfall
of $18.3 million. Negative financial results reflect increased
depreciation, interest and start-up expenses related to the opening of
EMCM. Furthermore, there were several unbudgeted items that impacted
profitability including upfront payments associated with workforce
reduction that are expected to yield long-term savings. Overall, Fitch
views EHN's profitability indicators as weak when compared against
Fitch's 'BBB' category medians.
FISCAL 2014 PERFORMANCE: Through the six-month interim period 2014, EHN
recorded an approximately $15.2 million loss from operations (negative
2.8% operating margin), which Fitch views negatively. The operating
losses are primarily driven by a confluence of factors that include
declining patient utilization patterns, close-down costs related to
EHN's former Montgomery Hospital, and various one-time expenses.
However, EHN is slightly ahead of its year-to-date budget and fully
intends to meet its year-end target of an approximate $1.8 million loss.
Management expects employee benefit changes, supply expense reductions,
labor productivity improvements, and enhanced volumes at EMCM to support
profitability growth throughout the rest of the fiscal year, which Fitch
views as attainable.
SATISFACTORY LIQUIDITY: At Dec. 31, 2013 EHN had $350.9 million of
unrestricted cash and investments, which equated to 122.7 days cash on
hand, 22.2x cushion ratio, 82% cash to debt. These metrics are mostly
consistent with Fitch's 'BBB' category medians of 144.7 days, 10.2x, and
GROWTH STRATEGY: Management's strategy to grow inpatient and outpatient
services in the northwest portion of EHN's service area is viewed
favorably. Fitch expects this strategy to increase EHN's market share in
a better payor mix environment, allowing the organization to continue
serving its challenged downtown service area.
HIGH MEDICAID PATIENT LOAD: EHN has a very high Medicaid patient load,
which accounted for approximately 30% of gross revenues through Nov. 30,
2013 and is reflective of the main facility's (Einstein Medical Center
(EMC (News - Alert))) challenging service area in North Philadelphia.
DECLINING INPATIENT ADMISSIONS: On a same-store basis (not including
ECMC or the old Montgomery Hospital) inpatient admissions continued to
fall for EHN for the fifth consecutive year. The inpatient utilization
drop is primarily due to unfavorable service area economic factors
hindering patient usage and increased observation encounters.
Specifically, inpatient admissions fell to 24,305 through June 2013 from
25,385 in June 2012.
OPERATIONAL IMPROVEMENT EXPECTED: Supporting the 'BBB+' rating is the
expectation that EHN will meet its budgeted goal for fiscal 2014 of an
approximate $5 million operating gain for the obligated group and near
break-even performance on a consolidated basis. Despite the large
operating loss experienced through six-months fiscal 014 on a
consolidated basis, management is confident in meeting its profitability
goals, which underpins the Stable Outlook. Any material difference from
budgeted plan may lead to negative rating pressure. Additionally, Fitch
expects consolidated operations to demonstrate gradual improvement over
time, while maintaining satisfactory performance consistent with current
levels at the obligated group level.
EHN operates Einstein Medical Center - Philadelphia, a 509-bed tertiary
teaching hospital in northern Philadelphia; EMCM, a new 170-bed facility
in East Norriton Township; Elkins Park Hospital, a 66-bed general
hospital; and MossRehab, a nationally recognized inpatient
rehabilitation hospital located in nearby Elkins Park. Additionally, EHN
operates several other ambulatory and specialized facilities. In fiscal
2013, EHN had total revenues of $1.06 billion.
AFFIRMATION OF 'BBB+' RATING
The rating affirmation of 'BBB+' continues to be supported by EHN's
leading market position in its historical service area and growth
strategy in a better payor mix environment, manageable capital plans,
and satisfactory liquidity position. EHN continues to have a leading
market presence in the greater Philadelphia area at 17.2%. Fitch views
favorably management's strategy of expanding services into the northwest
portion of its service area, which should improve EHN's payor mix and
profitability over the long term.
At Nov. 30, 2013 EHN had $351.6 million of unrestricted cash and
investments, which equaled 121 days cash on hand, 22.3x cushion ratio
(obligated group only maximum annual debt service - MADS), and 78.2%
cash to debt. Fitch views EHN's liquidity position as satisfactory for
the rating level as days cash on hand and cash to debt are near the
'BBB' medians of 144.7 days and 91.7%, respectively, while cushion ratio
compared particularly well against the median of 10.2x.
Fitch believes EHN's capital plans are manageable. Management plans to
spend approximately $335.2 million on various routine and clinical
information system needs from FY14-FY19. Management indicated that the
system has no near-term plans for any additional borrowing.
Additionally, EHN has a $150 million capital campaign that extends
through 2016, which will help fund the system's capital needs.
KEY CREDIT CONCERNS
Fitch's main credit concerns include EHN's weak profitability, all-in
debt service coverage metrics, and challenged service area
characteristics highlighted by serving a large Medicaid population.
EHN's consolidated profitability metrics have historically been weak,
averaging near breakeven operating performance (negative 0.1% operating
margin and 5.4% operating EBITDA margin) over the past four fiscal
years. In addition, EHN is highly dependent on supplemental funding
(Medicare and Medicaid disproportionate share funding, etc.), which
totaled approximately $70.5 million in fiscal 2013. Through the six
months ended Dec. 31, 2013, EHN had an operating loss of $15.2 million
(negative 2.8% operating margin),in part due to unfavorable volume
trends and several one-time related expenses. These costs included a
loss of productivity due to electronic health record implementation and
the out-migration of some voluntary physicians. However, management
expects to meet its fiscal 2014 budget of negative $1.8 million
operating loss. EHN's projected operating margin remains weak over the
near term but steadily improves to almost 2% in fiscal 2018.
MADS of $42.9 million includes the non-recourse FHA debt and results in
weak coverage for the rating level with 1.7x coverage by EBITDA and 1.1x
coverage by operating EBIDTA (fiscal 2013), compared to the respective
'BBB' category medians of 3.1x and 2.7x. A decline from existing all-in
debt service coverage metrics would be viewed negatively by Fitch and
could contribute to downward rating movement. Fitch notes that debt
service coverage on an obligated group basis was stronger, reflective of
a lighter debt burden - MADS of $15.7 million. This represented coverage
by EBITDA and operating EBITDA of 4.7x and 2.9x, respectively, in fiscal
EHN 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.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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