Fitch Affirms MetroHealth's (OH) Revs at 'A-'; Outlook Revised to Stable

SAN FRANCISCO--()--Fitch Ratings affirms the 'A-' long-term rating on MetroHealth's outstanding debt issued through County of Cuyahoga, Ohio:

--$17.6 million series 1997;

--$71.7 million series 2005;

--$75 million series 2009B.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by a gross revenue pledge.

KEY RATING DRIVERS

IMPROVED OPERATING PERFORMANCE: The revision in the outlook to Stable from Negative reflects the improved operating performance in fiscal 2013 (draft audit, Dec. 31 year end) and through the four months ended April 30, 2014. MetroHealth has benefited from Medicaid expansion and was able to capitalize on this one year earlier through a Medicaid waiver program (MetroHealth Care Plus). This program enrolled approximately 30,000 uninsured patients into Care Plus and the majority were existing patients for MetroHealth. In addition, all of these patients were successfully transitioned to traditional Medicaid in 2014. MetroHealth exceeded its fiscal 2013 operating income budget and expects to exceed its fiscal 2014 budget.

NEW LEADERSHIP TEAM: Since Fitch's initial rating in 2010, there has been management turnover and a new team has been in place for about a year. Fitch expects management stability especially as the organization is in need of a rebuild of its main campus.

DEMONSTRATED ABILITY TO MANAGE CHALLENGING PAYOR MIX: MetroHealth has a solid market position and plays an integral role as a provider of safety net services in the county. Because of its safety net role, it has an unfavorable payor mix with a high percentage of Medicaid and self-pay payors. Despite this, MetroHealth has demonstrated the ability to produce profitable operations and management attributes this success to its longstanding electronic medical record (Epic), closed medical staff, and care management processes. MetroHealth also has a good relationship with the county and receives an annual appropriation of approximately $36-40 million a year.

MAJOR CAPITAL NEEDS AHEAD: MetroHealth always had the need to address its aging plant; however, these plans have been accelerated due to facility issues during the most recent winter storms. The details of the master facility plan's cost and funding sources are still to be determined but management expects the majority to be funded from outside funding sources. Fitch will evaluate the impact of the master facility plan on the rating when details are finalized. MetroHealth has continued with its ongoing ambulatory expansion strategy with the opening of a multi-specialty ambulatory facility in the Cleveland suburb of Middleburg Heights in July 2013 and volume has exceeded original projections. MetroHealth's capital budget is approximately $40 million a year (1.3x depreciation expense).

MANAGEABLE DEBT BURDEN: MetroHealth's debt burden is manageable and its debt service is front loaded and declines after 2018. Sustained solid operating cash flow could result in some additional debt capacity at the current rating level.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: Fitch expects MetroHealth to sustain its improved operating performance and to maintain ratios in line for its rating level.

FUTURE CAPITAL NEEDS: Fitch will assess the impact of the master facility plan on MetroHealth's rating when plans are finalized and currently no additional debt is being contemplated.

CREDIT PROFILE

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 545 beds. Total revenue in fiscal 2013 (draft audit) was $849 million.

Improved Operating Performance

MetroHealth's operating performance improved since our last review and Fitch expects profitability to be more consistent especially due to the benefit from Medicaid expansion. In fiscal 2013, MetroHealth had a $13.4 million operating income (1.6% operating margin) compared to $5.6 million (0.7% operating margin) the prior year. The improved performance was mainly driven by the Care Plus program, which brought in an additional $70 million of federal dollars for expanded coverage for previously uninsured patients. In fiscal 2013, MetroHealth's self-pay as a percentage of gross revenues declined to 9.7% from 17.3% the prior year.

Through the four months ended April 30, 2014, operating performance has continued to improve with a 2.3% operating margin mainly due to the successful transition of the Care Plus population into Medicaid as well as significant managed care rate increases that went into effect in 2014. Management expects to exceed its fiscal 2014 operating income budget of $13.2 million (1.5% operating margin).

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). Although the market is competitive, MetroHealth's patient base is not competitive with the other health systems in the market including University Hospitals Case Medical Center (15.1% market share) and Cleveland Clinic (11.1% market share). MetroHealth had 12.4% market share in 2012.

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. The county appropriation has totaled approximately $36 million the last two years and has been increased back to $40 million a year for fiscal 2014 and 2015.

Given MetroHealth's importance to the county and the strong community support, Fitch would expect some county funding for the new hospital facility.

Challenging Payor Mix

MetroHealth's payor mix has improved with Medicaid expansion and as of March 31, 2014, gross revenue by payor was Medicare (24%), Medicaid (43.3%), managed care (22.4%) and self-pay (10.3%) compared to fiscal 2012 with Medicare (24.5%), Medicaid (33.3%), managed care (24.9%) and self-pay (17.3%).

MetroHealth's profitability is reliant on supplemental funding (disproportionate share and UPL) and some of these funds are expected to be reduced with the improved payor mix. Total Medicare and Medicaid DSH/UPL was $67 million in fiscal 2012, $69 million in fiscal 2013 and expected to be $45 million in fiscal 2014. The timing of the receipt of these funds has recently lagged the year in which they accrue and has understated liquidity.

Adequate Liquidity

MetroHealth's liquidity ratios are adequate for the rating level. Also impacting liquidity in the interim period is an unusually high accounts receivable balance due to the long payment period for the Care Plus program. Management expects this to return to more normal levels by the end of the fiscal year. As of April 30, 2014, MetroHealth had $287 million unrestricted cash and investments that equaled 130 days cash on hand and 121.6% cash to debt compared to the A category medians of 196.3 and 129.2%. Including the expected 2013 UPL funding and Care Plus accounts receivable, days cash on hand and cash to debt improve to 150 and 153%, respectively.

Planned Rebuild of Main Campus

MetroHealth's average age of plant is very high at 18 years, and a rebuild of the facility has always needed to be addressed and a rebuild of the facility is in the planning stages. During the recent winter storms, the facility had some damage, however, there were no patient safety issues. Management has engaged community support in the design of the new facility and is working on securing funds for the project. Fitch will assess the impact of the master facility plan on MetroHealth's rating when details are finalized.

Manageable Debt Burden

Total outstanding debt was $246 million at Dec. 31, 2013 and was 71% underlying fixed rate and 29% underlying variable rate debt. Its variable rate exposure includes $72 million of variable rate demand bonds (VRDBs) supported by a letter of credit from PNC bank, which expires in December 2015 and $25 million of indexed floating rate direct bank loan that has a mandatory put in December 2017. Unrestricted cash to putable debt is strong at over 4x. 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 2.5% of total revenue in fiscal 2013. 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 better with the improved cash flow with 2.8x coverage by EBITDA in fiscal 2012, 3.2x in fiscal 2013 and 3.7x through the four months ended April 30, 2014 compared to the A category median of 3.8x.

Disclosure

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832026

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Emily Wong, +1 415-732-5620
Senior Director
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst
Jennifer Kim, +1 212-908-0740
Associate Director
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Emily Wong, +1 415-732-5620
Senior Director
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst
Jennifer Kim, +1 212-908-0740
Associate Director
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com