OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the approximately $193,045,000 Wisconsin Health and Educational Facilities Authority revenue bonds, series 2016A and 2016B issued on behalf of Marshfield Clinic Health System (MCHS).

The Rating Outlook is Stable.

The series 2016A&B bonds are fixed rate and bond proceeds including bond premium will refund approximately $124 million of outstanding debt, provide $100 million of reimbursement for prior capital expenditures, and pay cost of issuance. The bonds are expected to price the week of Sept. 20.


The bonds are secured by a gross revenue pledge of the obligated group (OG).


BUSINESS MODEL PROVIDES STRONG FOUNDATION: Marshfield Clinic Health System's (MCHS) main credit strength is its current operating platform including a large, multispecialty physician group, health plan, and broad ambulatory footprint. This delivery model positions the organization well in the changing healthcare industry and the move towards value-based care. In addition, the system has a broad reach in north-central Wisconsin and serves 35% of the population in the primary service area (PSA).

ORGANIZATION IN TRANSITION AS IT EXECUTES ACUTE CARE STRATEGY: MCHS has historically partnered with various acute care providers and currently has only a 40-bed hospital in its system. MCHS is executing an acute care strategy with plans to add acute care facilities in its key markets. The ability to control and own this portion of the delivery system is expected to result in lower cost of care, savings to the health plan, and additional revenue/reimbursement from acute care services.

GOOD DEBT SERVICE COVERAGE BUT LIGHT PROFITABILITY: MCHS's profitability is lower compared to the 'A' category medians. However, its operating assets are substantially different from rated peers with generally lower margin ambulatory services and an all-employed physician base. However, due to its current low debt burden, debt service coverage is still solid. In addition, the acute care strategy should result in enhanced operating cash flow.

HIGH CAPITAL SPENDING EXPECTED: MCHS is currently formulating its capital spending plan, which is expected to be elevated over the next few years due to its acute care strategy. High priority items include adding acute care capacity in Marshfield and Eau Claire. There is currently a memorandum of understanding (MOU) in place to purchase St. Joseph's Hospital (MSJH) in Marshfield from Ministry Health Care (Ministry; part of Ascension Health, rated 'AA+'). Acute care capacity in the other key markets is expected to be on a smaller scale. Fitch has incorporated an additional new money issuance related to these plans as part of this rating.


EXECUTION OF ACUTE CARE STRATEGY: Fitch expects MCHS to successfully execute on its acute care strategy as it already operates a significant number of services in its current acute care provider partnerships. Although the financial profile will be further pressured in the near term due to the amount of capital required, Fitch expects Marshfield Clinic Health System to realize improved cash flow as a result of providing cost effective care in the right setting while benefiting from provider-based reimbursement. The failure to realize benefits over the near term could lead to negative rating pressure.


Marshfield Clinic Health System includes the Marshfield Clinic (the Clinic; 704 multispecialty physician group), Security Health Plan (SHP; 218,000 enrollees), expansive ambulatory footprint (over 50 locations), Lakeview Medical Center (40-bed hospital), Flambeau Hospital (25-bed CAH, jointly owned with Ministry), Family Health Center (31 FQHCs) as well as other related entities. The main clinic is located in Marshfield, WI, approximately 140 miles northwest of Madison, WI. MCHS has 46 clinic facilities and 10 dental clinics throughout central and north-central Wisconsin and the upper peninsula of Michigan. Of the 704 clinic physicians, 53% are located in Marshfield adjacent to MSJH, and the remainder are in regional locations in the markets of Wausau, Stevens Point, Minocqua, Eau Claire, and Rice Lake.

The OG includes the parent company, Marshfield Clinic, Lakeview Medical Center, and Family Health Center. There are two entities that are expected to join the OG group at a later date - MCHS Hospitals and Marshfield Clinic Health System Foundation. Both entities currently have minimal activity. Most notably, the OG excludes SHP. The OG accounted for approximately 60% of the consolidated entity's total revenue and 74% of the consolidated entity's total assets in fiscal 2015 (Sept. 30 year end). Fitch's analysis is based primarily on the consolidated entity. Total revenue of the consolidated entity was $2.1 billion in fiscal 2015.

MCHS was created about two years ago to govern the overall enterprise and, prior to 2014, the organization was Marshfield Clinic. Fitch believes this restructuring and growth into the acute care space should be accretive to the organization as it leverages the existing operating assets and benefits from aligned goals. The addition of acute care capacity that is part of the delivery system should be beneficial overall with the expectation of lower costs for consumers, higher return on revenue for the delivery system, and savings for the health plan.


Fitch views MCHS's business model favorably given the aligned physician base, a health plan that accounts for over 30% of the Clinic's payor mix, and an expansive footprint of ambulatory facilities including federally qualified health centers that provide a range of services from primary and preventative care (all primary care sites are patient-centered medical homes) to specialty care with ambulatory surgery centers and an oncology program. The Clinic also operates laboratory services as well as staff and cover all of the services at MSJH, and substantially all of the services in its existing acute care relationships in Minocqua and Weston.

The ability to add acute care capacity in the markets it serves will allow MCHS to provide care at a lower cost than current contracted rates with the various acute care providers. The additional capacity will also allow SHP to grow its footprint and better manage care and costs for those SHP enrollees that are under the care of Clinic physicians.


In MCHS's various markets, existing acute care relationships have generally been with Ministry or Hospital Sisters Health System (rated 'AA-'). The organization's strategic initiatives include hospital services expansion whether through partnerships, acquisition, or build-on-own.

There is currently a MOU in place for the acquisition of MSJH. A definitive agreement is expected in the next few months and an anticipated closing by early next year. Fitch has incorporated additional debt related to this potential transaction into this rating.

As part of the transaction, MCHS will also sell its 50% ownership in the Diagnostic and Treatment Center (other 50% owned by Ministry) to Ministry.

A capital plan was unavailable but other major projects include an acute care hospital and cancer center in Eau Claire and a cancer center in Stevens Point. Fitch believes the acute care strategy should be accretive to MCHS's financial profile and somewhat mitigates the near-term stress from the elevated capital spending.


MCHS's service area includes north, central, and western Wisconsin as well as 11 counties in the Upper Peninsula of Michigan. The PSA is defined as counties generating at least 1,000 unique patients and the system provides care to 35% of the residents in the PSA. In addition, 98% of the PSA is insured. The area is competitive with the presence of several regional health systems as well as providers that are part of larger, national health systems. The competition will increase with the expansion into acute care services; however, the additional capacity is sized to serve its current base of patients.

On the health plan side, there is no dominant national insurer in Wisconsin. SHP is the fifth largest plan in the state by enrollment and enrollment has increased 10% since 2012. SHP is committed to providing a broad spectrum of products including Medicare, Medicaid, and commercial including exchange plans. The health plan's strategic goals include improving market share while maintaining at least a 1%-2% operating margin.


MCHS is a unique entity in Fitch's rated portfolio as earnings and profitability are from lower margin, ambulatory services. This will change with the expansion into acute care services; however, the majority of revenue is still expected to be outpatient based.

The consolidated entity's operating EBITDA margin was 4.9% through the nine months ended June 30, 2016 compared to 6.8% in fiscal 2015, 5% in fiscal 2014 and the 'A' category median of 10.3%. Pressure in the interim period relates to issues with MSJH as negotiations related to the acquisition were underway. Projections were unavailable; however, pro forma figures including the elimination of revenue and expense related to SHP, improved Medicare provider reimbursement, as well as increased costs related to the new debt would result in an operating EBITDA margin of 9.2% and does not include additional financial improvement opportunities.

Unrestricted cash and investments were $620 million at June 30, 2016 compared to the OG with $411 million. Liquidity has declined due to higher capital spending in the interim period. Days cash on hand and cash-to-debt for the consolidated entity were 112 and 195.8%, respectively, at June 30, 2016 compared to the OG with 120.7 and 130.9%. Cash-to-debt will likely drop below 1x with the expected issuance of additional debt. The 'A' category medians for days cash on hand and cash-to-debt are 215.5 and 148.6%, respectively.

Current leverage is light and debt service coverage is good. The OG's debt service coverage was 4x through the nine months ended June 30, 2016 compared to 4.5x in fiscal 2015 and 2014 and the 'A' category median of 4.5x. The consolidated entity's debt service coverage is stronger at 4.9x through the nine months ended June 30, 2016, and 6.5x in fiscal 2015.


Total debt outstanding is approximately $321 million and is 51% fixed rate, 31% fixed-rate private placement, and 18% variable rate. Current maximum annual debt service (MADS) is $28.4 million. The series 2016 issuance will refund a bridge loan that was used to refinance the series 2006A bonds ($54 million), potentially refund the series 2006B bonds ($54 million), refund approximately $16 million of other leases and notes, and provide $100 million of reimbursement for prior capital expenditures. The estimated MADS post-series 2016 issuance is $25.2 million and the pro forma aggregate debt service schedule is level.

The debt burden is currently low with MADS accounting for 1.2% of total revenue compared to the 'A' category median of 2.7%.

The existing direct placement (series 2012A) is with JP Morgan and will be restructured as part of the series 2016 transaction, which will allow for the extension on the amortization of the private placement. There will be a mandatory tender in 2026 and the final maturity is in 2042.


MCHS covenants to provide annual and quarterly disclosure to EMMA.