OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' on the following bonds issued by New York City Health and Hospitals Corporation (NYHHC):

--\$112 million series 2013A;
--\$454.1 million series 2010A;
--\$107.8 million series 2008A;
--\$159.4 million series 2008B, C, D and E (variable).

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of NYHHC, which include all revenues derived from provision of patient care. Excluded are premium revenue from MetroPlus (NYHHC's Medicaid managed care organization) and monies provided by the city for capital programs.

Pledged funds flow through an exceptionally strong lockbox structure, with first dollars sequestered on a monthly basis for debt service before remaining funds are released for NYHHC's operations. Bond documents and related statute require maintenance of debt service reserve funds in the amount of maximum annual debt service (MADS), and the city is required to replenish draws on such funds (subject to appropriation), in the event NYHHC is unable to restore the funds to required levels.

KEY RATING DRIVERS

LOCKBOX MAIN CREDIT STRENGTH: On the 15th of each month, the bond trustee sets aside in a lockbox the first revenues NYHHC receives for debt service payments. Monthly revenues are available to NYHHC only after the revenue received covers the monthly debt service payment. Fitch views this lockbox structure as a major credit strength. In fiscal 2014, NYHHC had approximately 50x patient service revenue to debt service.

OPERATING ENVIRONMENT MAIN CREDIT CONCERN: As New York City's (NYC) safety net hospital system, with over 60% of gross patient service revenues coming from Medicaid, NYHHC is reliant on a number of city, state, and federal revenue sources to offset the cost of care for these lower reimbursed and indigent patient populations. These various revenue sources are continually vulnerable to cuts in spending and changes in methodology, with material impact expected to come as provisions of the Affordable Care Act continue to be implemented.

SERVICE ESSENTIALITY: Fitch views NYHHC's vital role as a part of NYC's health care infrastructure as a credit strength. NYHHC not only serves the most medically and economically vulnerable populations, both in an inpatient and outpatient setting (NYHHC recorded over 4 million outpatient visits in fiscal 2014), but it also operates six of NYC's 15 trauma centers, accounts for over a third of all NYC's inpatient psychiatric admissions, is the inpatient provider for the corrections system, and is the sexual assault response team for all NYC emergency rooms. Fitch believes this service essentiality positions NYHHC well to secure sufficient levels of funding from city, state, and federal sources necessary to continue to operate and pay debt service.

MANAGEMENT TEAM A STRENGTH: NYHHC has a seasoned management team that continues to produce a relatively stable financial performance, in spite of the operating challenges, works to maintain productive relationships with key stakeholders, including NYC officials, and has been able to make capital improvements at more than half the system's hospitals.

LINKAGE TO NYC RATING: NYHHC's rating is closely linked to Fitch's 'AA' rating on NYC's general obligation (GO) bonds (see 'Fitch Rates \$100MM GO Bank Bonds 'AA', Outlook Stable', dated Dec. 2, 2014) as NYC provides significant financial support to NYHHC, mostly through funds that NYC provides to matching federal supplemental funding programs. This support has ranged from \$1.3 billion to \$2 billion a year over the last four fiscal years and is expected to remain at approximately \$1.6 billion annually through fiscal 2017. In addition, NYC has provided \$2.1 billion in capital funds to NYHHC over the past 14 years. Further linking the ratings is NYC's obligation to replenish the bonds' debt reserve fund, subject to appropriation, should NYHHC deplete it. To date, NYHHC has never had to tap its debt service reserve fund to make bond payments.

RATING SENSITIVITIES

CONTINUED NEW YORK CITY SUPPORT: Changes to the levels of support that NYC provides to NYHHC would affect the rating.

SUPPLEMENTAL PAYMENT UNCERTAINTY: Cuts coming to federal disproportionate share funding as well as other changes driven by health care reform will keep pressure on NYHHC revenues. A material drop or disruption in the revenue flow could lead to negative rating pressure. However, Fitch believes NYHHC's service essentiality should enable it to continue to access adequate levels.

CREDIT PROFILE

Serving the five boroughs of New York City, NYHHC is the largest municipal hospital system in the country, and comprises 11 acute care teaching hospitals, three long-term care facilities, six diagnostic and treatment centers, more than 70 community health clinics, a large Medicaid managed care organization and a certified home health care agency. In fiscal year (FY) 2014, NYHHC had approximately \$833 million in long-term debt, of which approximately 80% is fixed rate and total revenues of \$8 billion in fiscal 2014.

STRONG SECURITY FEATURE
The 'A+' rating and Stable Outlook reflect the strength of the lockbox structure, NYC's ongoing support of NYHHC, an experienced management team, and the essentiality of NYHHC's operations. Credit concerns include NYHHC's challenging operating environment and stress on revenues from changes expected in supplemental payments, uncertainty regarding the implementation of other parts of health care reform, and the ability of NYC to continue to provide support at historical levels. Mitigating some of the concern is the patient service lockbox revenue to annual debt service ratio which was 60x at June 30, 2014 and the city's debt service reserve replenishment obligation.

STABLE FY2014 PERFORMANCE
NYHHC produced a negative 1.6% operating margin and a 3.6% operating EBTIDA in FY2014 on a consolidated basis, which includes MetroPlus. The performance was much better than FY2013 when the operating margin was a negative 9.2% and the operating EBITDA a negative 3.8%. FY2013 was impacted heavily by Sandy, with disruptions to operations and a number of NYHHC hospitals sustaining damage including Bellevue and Coney Island Hospitals.

In FY2014, patient service revenue recovered after dropping in FY2013 and grew by 10%, helped by an additional \$180 million in UPL and DSH max funds. MetroPlus revenues grew a solid 6% as well, helped by an increase in enrollment via the public insurance exchanges, which were in their first year. NYHHC financial performance also continued to be helped by support from NYC, which provided a total of \$404 million in additional funds through retroactive funding of labor contracts and the waiving of payments owed by NYHHC. Expenses remained relatively flat growing by just 2%.

As a result of the financial performance, unrestricted cash and investments remained stable at approximately \$1.1 billion, which equated to 52.4 days cash on hand (DCOH) and 113.3% cash to debt as of June 30, 2014.

First quarter FY2015 results show continued stability in financial performance, and a \$1.2 billion retroactive UPL adjustment is expected to be received in the fourth quarter of FY2015, which should keep bottom line financial performance stable year over year. Moving forward, reductions to DSH and other funding sources are projected, with operating deficits expected to exceed \$1 billion by FY2017 without corrective actions.

DSRIP AND CORRECTIVE ACTIONS
New York State was approved for funds under the Delivery System Reform Incentive Payment (DSRIP) program, a Medicaid 1115 waiver program. Through DSRIP, federal funding is available to states for hospitals and other providers in changing the care provided for those on Medicaid. New York State has received approval for \$8 billion of funds of which approximately \$6 billion will be available for performance-based payments. Among the many goals of the program is to reduce avoidable hospital use by 25% statewide. Coalitions have been formed to apply for state funding awards and each coalition must include a safety net hospital.

Funding will be based on the size of the population being served by the individual coalitions. NYHHC has submitted an application for the maximum 11 projects and its coalition includes SUNY Downstate Medical Center and a number of community partners. NYHHC has already received \$154 million in DSRIP funds as part of an Interim Outpatient Access Award and for project planning. The full application awards are expected to be announced in March. The DSRIP funding, should NYHHC receive an award, will help offset some of the reductions expected in supplemental funding revenue over the next few years. However, the DSRIP program has administrative and implementation costs, and it is a short term funding program with the stated goal of reducing hospital use. Longer term support for the outpatient services to be provided and expanded under DSRIP is unclear, and most of the current federal supplemental programs are based on inpatient admissions.

NYHHC management continues to find ways to reduce costs and create system efficiencies. These efforts achieved over \$750 million in saving in FY2014, and NYHHC is budgeting an additional \$279 million for FY2015. These efforts should help mitigate the impact of cuts in the future outlying years. But the uncertainty of future payment systems, especially for outpatient services, and the expected reduction of inpatient hospital use are credit concerns over the medium term.

SANDY DAMAGE UDATE
NYHHC sustained material damage at two of its acute care hospitals, Bellevue and Coney Island, during Hurricane Sandy, and both hospitals were closed for a period of time. The hospitals were back in service by March of 2014. NYHHC has received approximately \$250 million in funds to date from FEMA and expects to receive a total of approximately \$1.7 billion total over time, with the two largest amounts allocated to Bellevue (\$499.2 million) and Coney Island (\$922.7 million).

DISCLOSURE
As per its continuing disclosure agreement, NYHHC agrees to provide annual audited and quarterly financial statements to the MSRB's EMMA system.