|[March 05, 2014]
Fitch Affirms Carroll Hospital Center (Maryland) Revs at 'BBB+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the 'BBB+' rating on the following Maryland Health
& Higher Educational Facilities Authority bonds (Carroll Hospital Center
Issue) issued on behalf of Carroll Hospital Center (CHC).
-- $59,780,000 revenue bonds, series 2012A;
-- $35,000,000 revenue bonds, series 2006.
The Rating Outlook is Stable.
Security pledged for the bonds consists of a lien on all obligated group
(OG) cash receipts and a mortgage granted on most OG facilities.
KEY RATING DRIVERS
STRONG OPERATING PERFORMANCE: The affirmation of the 'BBB+' rating is
supported by CHC's strong operating performance. CHC had a 3.7%
operating margin and 12.2% operating EBITDA in fiscal 2013 (June 30
year-end), above Fitch's 'BBB' respective category medians of 1.8% and
9.0%, and an improvement over the prior year. Six-month fiscal 2014
interim results show operations remaining stable.
TPR EXTENDED: CHC signed a three-year contract with Maryland's
rate-setting commission to stay in the Total Patient Revenue (TPR)
program, which Fitch views favorably. At this time last year, there was
uncertainty surrounding CHC remaining under TPR. Under the new
agreement, CHC maintained both its base rate and the extension of
additional revenue for added volume expected with a new cancer center
opening fall 2014. However, CHC received less of a revenue increase
relative to the expected volume increase from the area's growing senior
BALANCE SHEET STRENGTH: While CHC management expects unrestricted cash
and investments to decline by approximately $21.3 million through June
2015 due to a combination of capital spending and stress from the ICD-10
conversion, Fitch believes CHC's balance sheet has enough flexibility to
absorb the decline at the current rating level in the short- to
medium-term. CHC's long-term capital plans are significant, however, and
could pressure their future liquidity.
GOOD MARKET POSITION: CHC maintains a leading 56.5% (FY2013 figures)
inpatient/observation market share, in a solid service area (Carroll
County GOs rated 'AAA' by Fitch), with its nearest competitor, Frederick
Memorial Hospital (rated 'BBB+'), located outside the county,
approximately 25 miles away, with a market share below 7%.
MAINTAINING TPR PERFORMANCE: While CHC has posted a very solid operating
performance under TPR (operations were essentially break-even the year
prior to CHC joining TPR), some of that operational gain has been due to
one-time incentives provided by the rate-setting commission, in part, to
smooth the transition into the program. The next few years should
provide a better indication of CHC's underlying operational performance
under TPR. Should CHC be able to continue to outperform Fitch's 'BBB'
medians over the next few years, there is potential for positive rating
CHC is a 151-bed acute-care hospital located in Westminster, MD,
approximately 40 miles northwest of Baltimore. Total consolidated
operating revenues, including the hospital and various othr smaller
subsidiaries, totaled $285.5 million in fiscal 2013.
STRONG OPERATING PERFORMANCE
FY 2013 concluded with a solid 3.7% operating margin and a 12.2%
operating EBITDA margin, both of which are better than the 1.8% and 9.0%
respective 'BBB' category medians. A decline in volumes has allowed CHC
to manage its operating expenses better, which increased its profit
margin under the TPR reimbursement agreement.
Another year of strong operations in FY 2013 supports ample coverage of
CHC's maximum annual debt service (MADS) of $9.995 million. With 4.0x
and 3.5x coverage by EBITDA and operating EBITDA, respectively, CHC
exceeds Fitch's corresponding 'BBB' medians of 3.1x and 2.7x.
Under the TPR payment model, participating hospitals receive a total
revenue figure for the year for services covered by Maryland's
rate-setting commission, and that figure is fixed regardless of
fluctuations in volume levels or acuity indicators. Fitch views the
terms of CHC's new contract as credit neutral. Overall, CHC has
performed well under the program and expects to remain favorable to the
'BBB' profitability medians under the new agreement.
The previous three years operating under TPR have provided CHC with
experience necessary to navigate this fixed revenue budget reimbursement
structure. CHC has experienced reductions in inpatient volumes and an
increase in utilization of services not subject to the TPR agreement
(home health, hospice and imaging procedures). CHC's continued strong
operating performance is attributable to the alignment between TPR
program goals and CHC goals.
BALANCE SHEET STRENGTH
As of Dec. 31, 2013, CHC had $126 million in unrestricted cash and
investments, which equated to 174.7 days cash on hand, a 12.6x cushion
ratio, and 90.8% cash to debt; all stronger than the same period in the
prior year and in line with the respective 'BBB' Fitch medians. Despite
the likely decline in CHC's unrestricted cash and investments, Fitch
expects that liquidity metrics will not drop below 'BBB' medians in the
short- to medium-term.
Furthermore, CHC's liquidity relative to its variable rate debt (30% of
debt mix) is expected to remain strong with twice as much unrestricted
liquidity relative to variable rate debt, bolstering its ability to
manage additional cash demands should any of the outstanding variable
rate debt be put back to the issuer.
GOOD MARKET POSITION
CHC's caseload in its primary service area has declined 10% between 2010
and 2013 in comparison to a 3% decline for competing hospitals' caseload
over the same period. CHC, notably, operates under a different set of
incentives under the TPR rate methodology that encourages reducing
utilization, where appropriate. CHC has maintained its position as
market leader in addition to successfully reducing utilization to the
extent that it supports more efficient cost management.
Fitch considers CHC's disclosure practices to be very good, with
quarterly data and annual data (150 days after fiscal year end) posted
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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