Fitch Affirms MetroHealth (OH) Rev bonds 'A-'; Stable Outlook
OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' long-term rating on MetroHealth's outstanding debt issued through County of Cuyahoga, Ohio:
--$17.6 million series 1997;
--$71.3 million series 2005;
--$75 million series 2009B.
The Rating Outlook is Stable.
The bonds are secured by a gross revenue pledge.
KEY RATING DRIVERS
CONTINUED SOLID OPERATING PERFORMANCE: MetroHealth has sustained its improved operating performance in fiscal 2013 (Dec. 31 year end) with continued solid profitability in 2014 and through the six months ended June 30, 2015. As a safety net provider, MetroHealth significantly benefited from Medicaid expansion and has been able to retain the newly insured population. Volume growth has been solid and is due in part to its ambulatory network strategy.
INTEGRAL PART OF COUNTY: MetroHealth plays an integral role as a provider of safety net services in the county and receives ongoing support from the county through annual appropriations of approximately $40 million a year. MetroHealth has demonstrated the ability to be profitable with its challenging payor mix due to its longstanding electronic medical record (Epic), closed medical staff, and care management processes.
MAJOR CAPITAL NEEDS AHEAD: MetroHealth has a campus transformation plan underway; however, details on the plan are still unavailable. MetroHealth is moving forward with the first piece of the master facility plan with the building of an 85 bed intensive care unit (ICU). The total campus transformation plan and funding sources are expected to be finalized in 2016. Fitch will evaluate the impact of the master facility plan on the rating when details are finalized but it is expected that the majority of cost will be funded by other entities (i.e. county, philanthropy).
MANAGEABLE DEBT BURDEN: MetroHealth's debt burden is manageable and its debt service is front loaded and declines after 2018. Management indicated that there are no additional debt plans associated with its campus transformation project at this time.
GOOD LIQUIDITY: Liquidity has remained stable and fluctuates given the timing of the receipt of supplemental funding but at June 30, 2015, days cash on hand was 145 and cash to debt was 150.3% compared to the A category medians of 205.3 and 143.7%.
SUSTAINED OPERATING PERFORMANCE: Fitch expects MetroHealth to sustain its operating cash flow especially given the higher capital spending in 2015 and 2016 related to the 85 bed ICU project.
FUTURE CAPITAL NEEDS: Fitch will assess the impact of the master facility plan on MetroHealth's rating when plans are finalized. Currently no additional debt is being contemplated.
MetroHealth is a political subdivision of Cuyahoga County and the system provides a comprehensive range of services that include a Level I trauma center, Level II pediatric trauma center, Level III neonatal intensive care unit, and regional burn unit. The main facility is MetroHealth Medical Center located in Cleveland, Ohio that operates 407 acute care beds and 150 skilled nursing beds. Total revenue in 2014 was $900 million.
After a period of management turnover, the current chief executive officer has now been with the organization since June 2013 and has filled many of the executive team positions during 2014. Fitch expects ongoing management stability especially with the imminent campus transformation project.
Solid Operating Performance
MetroHealth's operating performance improved during our last review in May 2014 and the trend has been sustained. In 2014, MetroHealth had a $30.2 million operating income (3.4% operating margin) compared to $13.4 million operating income (1.6% operating margin) in 2013 and $5.6 million (0.7% operating margin) in 2012. The improved performance has been driven by Medicaid expansion, strong volume growth, and continued focus on expenses. Total surgeries increased 6.2% and outpatient visits increased 7.1% in 2014. The cost per patient visit dropped to $736 in 2014 from $769 in 2011. MetroHealth continues to expand its ambulatory locations and announced a recent partnership with Discount Drug Mart to operate primary care offices within the drugstore to enhance access.
Through the six months ended June 30, 2015, operating margin was 1.8% compared to 1.7% the prior year period and management is on target to outperform its 2015 operating income budget of $16.3 million (1.8% operating margin). Management indicated that performance in the second half of the year is typically stronger.
Strong Community Support
MetroHealth plays an integral role in the county as a safety net provider with over 80% of its discharges originating from Cuyahoga County (unlimited GO bonds rated 'AAA' by Fitch). The market is competitive and consolidated with University Hospitals (UH) and Cleveland Clinic as the main competitors. UH has announced plans to start Level I trauma services in December 2015, which would have a negative impact on MetroHealth.
MetroHealth maintains strong community support with the consistent receipt of county appropriations. The county appropriations have been funded through two voter-approved health and human services tax levies. Although these tax levies are not dedicated specifically to MetroHealth, the system has always received a portion of the funds, which is determined solely by the county. In addition, there is strong voter support for the levies, which has passed in every election since 1980 with at least 53% support. One of the levies will be up for renewal in November 2016. The county appropriation declined to $36 million in 2012 and 2013 years but increased back to $40 million a year in 2014 and 2015 and $40 million is requested for 2016.
Given MetroHealth's importance to the county and the strong community support, Fitch expects some county funding for the new hospital facility.
Challenging Payor Mix
MetroHealth's payor mix has improved with Medicaid expansion and through the six months ended June 30, 2015, gross revenue by payor was Medicare (26.8%), Medicaid (45.5%), managed care (22.4%) and self-pay (5.3%) compared to 2010 with Medicare (24.1%), Medicaid (30.8%), managed care (25.4%) and self-pay (19.7%). After Medicaid expansion, MetroHealth has retained the newly insured as well as new Medicare beneficiaries, who previously would leave the system after qualifying for Medicare.
Given MetroHealth's role, supplemental funding remains a key funding source and some of these funds are expected to be reduced with the improved payor mix. Total Medicare and Medicaid DSH/UPL was $62.9 million in 2012, $67.3 million in 2013, $76.2 million in 2014 and expected to be $63.9 million in 2015 and $61.2 million in 2016. A portion of the amount received in 2014 ($13.4 million) may be due back to the program pending the completion of federal DSH audits.
MetroHealth's liquidity ratios are good for the rating level especially relative to debt. Days cash on hand has remained fairly stable while cash to debt has improved to 150.3% at June 30, 2015. There was a recent change in state law regarding allowable investments by governmental entities and a new investment policy/asset allocation is expected in early 2016.
Planned Rebuild of Main Campus
MetroHealth's average age of plant is very high at 18.9 years, and a rebuild of the facility has always needed to be addressed. The campus transformation project has been accelerated due to damage during the winter storms in 2014. However, there are still no details regarding the total cost and funding of the project. MetroHealth is proceeding with the first phase of the project, which is the construction of an 85 bed ICU. This will cost $82 million and will be funded from various sources. Total capital spending is expected to be $66 million in 2015 and $71 million in 2016 compared to its recent capital budgets of approximately $40 million a year.
Manageable Debt Burden
Total outstanding debt was $237 million at Dec. 31, 2014 and was 60% underlying fixed rate and 40% underlying variable rate debt. Its variable rate exposure includes $71 million of variable rate demand bonds (VRDBs) supported by a letter of credit from PNC bank (series 2005), which expires in December 2015 and $23.1 million of an indexed floating rate direct bank loan that has a mandatory put in December 2017. Management is evaluating direct bank loan proposals to refinance the series 2005 bonds. Unrestricted cash to putable debt is strong at almost 5x. MetroHealth has two floating to fixed payor swaps and there are no current collateral posting requirements.
MetroHealth's debt burden is manageable with MADS accounting for 2.3% of total revenue in 2014. MADS is $20.95 million (gross interest on BABs) and occurs in 2018. Then debt service declines to $17 million until 2028 when it reduces significantly to $13 million. Debt service coverage is solid at 4.1x in 2014 and 3.5x through the six months ended June 30, 2015 compared to 3.2x in 2013, 2.8x in 2012, 2.6x in 2011 and the A category median of 4.2x.
MetroHealth covenants to provide annual audited information within 180 days of fiscal year end and unaudited quarterly financial information within 60 days of quarter end.