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Fitch Affirms AnMed Health's (South Carolina) Revs at 'A+'; Outlook StableFitch Ratings has affirmed the 'A+' rating on the following South Carolina Jobs-Economic Development Authority (SC) hospital refunding revenue bonds issued on behalf of AnMed Health (AnMed): --$22,130,000 series 2010; --$34,585,000 series 2009A*; --$111,100,000 series 2009B; --$56,350,000 series 2009C; --$18,545,000 series 2009D*. *Underlying ratings. The bonds are secured by an irrevocable direct pay letter of credit from Wells Fargo (News - Alert) Bank, N.A. The Rating Outlook is Stable. SECURITY Bonds are secured by AnMed's gross revenues and pledged assets, excluding standard permitted encumbrances. KEY RATING DRIVERS CONSISTENTLY STRONG OPERATING RESULTS: AnMed has been able to sustain solid and consistent operating results over the past four years. Operating EBITDA margins have exceeded 13% in fiscal 2013 and 2014 and through the nine-months-ended Sept 30th which exceeds the 'A' category median of 10.3%. Fitch believes AnMed's strong profitability reflects the benefits of its affiliation with Carolinas HealthCare System (CHS) and its ability to maintain its dominant market position in Anderson County. ROBUST LIQUIDITY: AnMed's strong cash flow generation has resulted in further improvement in unrestricted cash and investments. At Sept 30th, unrestricted cash and investments totaled $458.1 million which is up from $419.2 million at FYE 2013. Days cash on hand of 386.0 and cash to debt of 169.4% both exceed 'A' category medians and provide a solid financial cushion to offset concerns about AnMed's payor mix and limited geographic diversity. AFFILIATION WITH CAROLINAS HEALTHCARE SYSTEM: Since 2009, AnMed has operated under a ten year Management Services Agreement with CHS. Management attributes some of its financial success to the improved revenue cycle management, supply chain initiatives, and access to analytics and strategic planning that it has derived from this affiliation. LIMITED GEOGRAPHIC DIVERSITY: While AnMed maintains a dominant 72.2% inpatient market share (2015 data) in its primary service area of Anderson County, it faces significant competition from nearby Greenville Health System (revenue bonds rated 'AA-') and Bon Secours St. Francis Health System (revenue bonds rated 'A') limiting its ability to grow into areas northeast of Anderson. RATING SENSITIVITIES STABLE OPERATIONS EXPECTED: Fitch expects AnMed's operating performance to remain relatively stable over the rating period. While there may be some erosion in 2015 and 2016 results due to the non-recurring costs associated with the termination of its defined benefit pension plan (non-cash), operating results are expected to be consistent with historical levels. Liquidity is expected to remain strong through manageable capital plans including an $85 million IT project. CREDIT PROFILE AnMed Health is comprised of two separately licensed facilities consisting of 533 licensed (389 staffed) beds located in Anderson, SC. The main campus includes the AnMed Health Heart and Vascular Center, while the North Campus contains the Women's and Children's Hospital and the AnMed Health Cancer Center. AnMed is currently the only obligated group member. Non-obligated system entities include the AnMed Health Foundation, AnMed Health Enterprises (holding company for certain joint ventures), a taxable physician practice management services and a taxable home care and pharmacy services entity. The 40-bed AnMed Rehabilitation Hospital (a joint venture with HealthSouth Corporation) located on the North Campus and Cannon Memorial Hospital, a 55-bed hospital in Pickens that was integrated into the health system in 2014, are not members of the obligated group. The analysis in this report is based on obligated group financial reports. In fiscal 2014, the obligated group represented 95% of all system assets and 94% of total system revenues. SOLID FINANCIAL PROFILE Since Fitch's last rating action, AnMed has continued to deliver strong operating results by focusing on core clinical delivery, leveraging its affiliation with CHS, and benefiting from a modest improvement in payor mix. The result is manifested in a 4.1% operating margin in fiscal 2014 from 3.5% in fiscal 2013. Margin is likely to be impacted by the decision to terminate the defined benefit plan in 2016 that was frozen as of December 31, 2009. The pension plan is actuarially fully funded, but the termination will result in a non-recurring $64.5 million non-cash charge, $4.3 million of which is expected to be reflected in the fiscal 2015 audit. Nine-month interims through September indicate a 3.2% margin, before the expected non-cash charge of $4.3 million related to the planned termination of the pension plan. Consequently, there will be an impact on the income statement in fiscal 2015 and 2016 but the balance sheet strength will be preserved. Historical coverage of MADS ($16.1 million ) by EBITDA has been solid at 5.7x in 2014 and 5.1x through 9 month interim period reflecting AnMed's strong profitability and exceeding the 'A' category median of 4.2x. Despite its dominant market position in Anderson County, the medcal center faces significant competition 30 miles north from Greenville Health System and Bon Secours St. Francis Health System, limiting its ability to grow into areas northeast of Anderson. Instead, the medical center has strategically focused on maintaining its position in the primary service area by growing its active medical staff to 520 physicians as of September 2015 from 471 physicians in December 2013. Part of the physician growth was driven by an emphasis on physician employment which increased to 173 from 145 employed doctors in the comparable period. Despite the increase in financial losses on physicians in 2014 and 2015 due to routine start-up costs, AnMed generated adequate growth, particularly in outpatient surgeries, to sustain high operating margins. The inpatient admissions have softened in 2015 to 18,860 from 19,248 as observation stay classifications have grown to 7,430 from 6,526. AnMed has shifted its physician strategy over the past two years to employing specialists as opposed to earlier efforts on primary care physicians. To that end, the medical center acquired practices in endocrinology, oncology and hematology in 2014 (among others) and an eight physician surgical practice in 2015. Primary care physicians still represent 74% of AnMed's employed medical staff. With a strong clinical reputation and a staff of employed physicians, AnMed has maintained its dominant market position and experienced a slight uptick in the acuity level for patients in 2015. Medicare CMI in 2015 was 1.6. AnMed also benefited from stability in Medicaid rates in the past two years (representing 14% of gross revenues) and an increase in its combined Medicare and Medicaid disproportionate share payments (DSH) to $20.7 million in 2014 from $14.8 million in 2012. The combined figure in 2015 was approximately $18.7 million. While management is not expecting any additional cuts to Medicaid funding in 2016, Fitch views DSH funding reductions at the federal level to be a longer term credit concern particularly since South Carolina has not participated in expanded Medicaid eligibility. Additionally, AnMed's self-pay decreased from 6% of gross revenues in 2013 to 3% of gross revenues as of September 2015, while benefiting from increases in Medicaid and managed care. This swing is due to both increasing Medicaid qualifications as well as an improvement in the local job market. Despite AnMed's strong financial profile, it does not benefit from wide geographic or revenue dispersion and as such is more susceptible to changes in the local economy. POSITIVE AFFILIATION WITH CHS AnMed is one of the largest hospitals affiliated with CHS through a Management Services Agreement. Fitch views this affiliation favorably as the medical center has been able to benefit from supply chain initiatives, revenue cycle management improvements, contracting, and other strategic alliances. Currently, CHS has been providing access to analytics and other tools needed as AnMed begins to prepare for future value-based payments or population health management needs that have not yet arrived in its market. AnMed's managed care contracts are still based on more traditional fee-for-service models. The affiliation with CHS has also helped AnMed expand and grow its oncology services as its cancer center is a charter member of CHS' Levine Cancer Institute. The affiliation contract with CHS expires in 2019, and while it is too early to determine whether it will be renewed, AnMed continues to view this relationship favorably. MODEST CAPITAL PLANS SHOULD PRESERVE LIQUIDITY STRENGTH As indicated in the last review, AnMed borrowed $35 million in a private bank placement debt issuance in 2014 for certain renovations at the hospital campuses and the replacement of its central information system. This information system upgrade comes at a total cost of $85 million; $13 million in 2015, $42 million in 2016 and $23 million in 2017, and $7 million in 2018. Other than this project, the annual capital budget is dedicated to routine capital expenses. Consequently, Fitch expects that barring any major unexpected billing or productivity disruption as the information system is converted, AnMed will be able to maintain ample cash reserves over the two-year outlook period. At Sept. 30, 2015, AnMed had $458.1 million in unrestricted cash and investments, which equates to 386 days cash on hand, a 28.5x cushion ratio, and 169.4% cash to debt. While these numbers represent a slight softening from fiscal 2014 year-end liquidity ratios of 415.4 days cash on hand, 29.0x cushion ratio, and 168.7% cash to debt, they remain significantly above Fitch's 'A' category medians. DISCLOSURE AnMed Health covenants to disclose only annual information to EMMA and disclosure to date has been timely. Management does voluntarily disclose quarterly information including balance sheet, income statement, cash flows statement, utilization indicators and a management discussion and analysis. Additional information is available at 'www.fitchratings.com'. Applicable Criteria
Not-for-Profit Hospitals Rating Criteria (pub. 04 Dec 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
2015) Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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