Feb 6 - Fitch Ratings has affirmed the 'BBB+' rating on the following
Pennsylvania Economic Development Financing Authority's (PA) health system
revenue bonds issued on behalf of Einstein Healthcare Network (EHN, formerly
Albert Einstein Healthcare Network):
--$123.7 million Pennsylvania Economic Development Financing Authority health
system revenue bonds, series 2009A.
The Rating Outlook is Stable.
Additionally, Einstein Medical Center Montgomery (EMCM), an affiliate of EHN,
has approximately $314.9 million of Federal Housing Administration (FHA) insured
mortgage revenue bonds, series 2010 outstanding. The FHA bonds are non-recourse
to the EHN obligated group and are not rated by Fitch. In total, EHN system had
outstanding debt of approximately $438.2 million as of Dec. 31, 2012 (six-months
interim period; unaudited).
The bonds are secured by a gross revenue pledge, lien on property of the
obligated group, and a debt service reserve fund.
MIXED FINANCIAL PROFILE: EHN's financial profile has mixed indicators when
compared against Fitch's 'BBB' category medians. Specifically, Fitch views the
organization's balance sheet as satisfactory, while operating profitability and
all-in debt service coverage ratios compare unfavorably.
NEW HOSPITAL COMPLETE: Construction of EMCM was successfully completed on time
and below budget in Sept. 2012. The facility has observed greater than
anticipated volumes since opening and serves as EHN's major inpatient facility
in the northwest portion of its service area. Fitch analysts toured the new
facility and view it favorably.
GOOD GROWTH STRATEGY: Management's strategy to grow inpatient and outpatient
services into the northwest portion of EHN's service area is viewed favorably,
which should grow market share in a better payor mix environment and allow the
organization to continue serving its challenged downtown service area.
HIGH MEDICAID LOAD: EHN has a very high Medicaid patient load, which accounted
for approximately 34.5% of gross revenues through Dec. 31, 2012 and is
reflective of the main facility's (Einstein Medical Center (EMC)) challenging
service area in North Philadelphia.
DECLINING INPATIENT ADMISSIONS: Inpatient admissions continued to fall for EMC
for the fourth consecutive year. The inpatient utilization drop is primarily due
to unfavorable service area economic factors hindering patient usage as well as
the system recording an increased amount of observation encounters.
Specifically, observation encounters rose to 4,740 through Dec. 2012, which is
up from 3,412 in Dec. 2011.
AFFIRMATION OF 'BBB+' RATING
The rating affirmation of 'BBB+' is supported by EHN's strong market position
and good growth strategy in a better payor mix environment, manageable capital
plans, and satisfactory liquidity position. EHN continues to have a strong
market presence in the greater Philadelphia area at 17.2%, which is tied in the
market along with Temple University Health System (revenue bonds rated 'BBB-';
Stable Outlook by Fitch). Along with the organization's top market position,
Fitch views favorably management's strategy of expanding services into the
northwest portion of its service area, which should improve EHN's payor mix and
profitability over the long-term.
At Dec. 31, 2012 EHN had $375.9 million of unrestricted cash and investments,
which equaled 131.9 days cash on hand, 22.9x cushion ratio (obligated group only
maximum annual debt service - MADS), and 85.8% cash to debt. Fitch views EHN's
liquidity position as satisfactory for the rating level as days cash on hand and
cash to debt are near the 'BBB' medians of 138.9 days and 82.7%, respectively,
while cushion ratio compared well against the median of 9.4x.
In Sept. 2012, EMCM was completed on time and under budget. The facility is
expected to finish fiscal 2013 with $143.2 million in net patient service
revenue (nine months of operations) and achieve a 4.6% operating margin by
fiscal 2018 (near breakeven in FY2015). The facility is already ahead of its
volume projections, which is expected to grow further as EHN begins to capture
previously out-migrating services in this market. Overall, Fitch believes the
new facility will be integral as EHN improves its overall payor mix and
EHN's capital plans are manageable as management plans to spend approximately
$363.5 million on various routine and clinical information system needs from
FY13 - FY18. Management indicated that the system has no near-term plans for any
additional borrowing. Additionally, EHN is embarking on a $100 million capital
campaign that extends through 2016, which will help fund the system's capital
needs. To date, EHN has received $82 million in commitments.
KEY CREDIT CONCERNS
Fitch's main credit concerns include EHN's weak profitability, all-in debt
service coverage metrics, and challenged service area characteristics
highlighted by serving a large Medicaid population.
EHN's consolidatedprofitability metrics have historically been weak with a 0.2%
operating margin ($2 million operating income) in fiscal 2012 and 1.7% operating
margin ($15 million operating income) in fiscal 2011. In addition, EHN is highly
dependent on supplemental funding (Medicare and Medicaid disproportionate share
funding), which totaled approximately $66 million a year in fiscal 2011 and
2012. Through the six months ended Dec. 31, 2012, EHN had an operating loss of
$18.6 million (negative 3.5% operating margin) due to increased depreciation and
interest expense related to EMCM, larger than anticipated start-up costs
associated with EMCM as well as increased close-down costs from the unoccupied
former Montgomery Hospital. Additionally, increased observation encounters are
having a significant drain on operating profitability. Management expects to
meet its fiscal 2013 budget of negative $18.3 million in operating losses. EHN's
projected operating margin remains weak over the near term, but steadily
improves to almost 2% in fiscal 2018.
Maximum annual debt service (MADS) of $39.3 million includes the non-recourse
FHA debt and results in weak coverage for the rating level with 1.7x coverage by
EBITDA and 1.3x coverage by operating EBIDTA (fiscal 2012), compared to the
respective 'BBB' category medians of 2.8x and 2.5x. However, debt service
coverage on an obligated group basis was stronger, reflective of a lighter debt
burden - $16.4 million. This represented 1.6% of revenues in 2012 and coverage
by EBITDA and operating EBITDA was a good 4.2x and 3.3x, respectively.
The Stable Outlook reflects Fitch's expectation that EHN will maintain its
current balance sheet levels and improve its profitability once EMCM's
operations reach a steady state. Fitch expects EHN to capitalize on the strategy
of expanding its market presence into the northwest portion of its service area,
which should improve profitability over the long-term. If EHN is not able to
meet its budgeted goals or the financial profile significantly deteriorates from
current levels, negative rating pressure may be warranted.
EHN operates Einstein Medical Center - Philadelphia, a 509-bed tertiary teaching
hospital in northern Philadelphia; EMCM, a new 146-bed facility in East Norriton
Township; Elkins Park Hospital, a 66-bed general hospital; and MossRehab, a
nationally recognized inpatient rehabilitation hospital located in nearby Elkins
Park. Additionally, EHN operates several other ambulatory and specialized
facilities. In fiscal 2012, EHN had total revenues of $1.03 billion.
EHN provides annual and quarterly disclosure to the MSRB's EMMA system. Overall,
Fitch views EHN's disclosure favorably, which consists of a balance sheet and
statement of profitability and loss, cash flow statement, and utilization
information. Management was candid and timely in its responses to Fitch during
the credit review process.