Fitch Upgrades Cass Medical Center (MO) Revs to 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded to 'BBB' from 'BBB-' the rating on $45,490,000 revenue bonds, series 2007, issued by Cass County, Missouri on behalf of Cass Regional Medical Center (Cass).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net revenues (includes funds from county appropriations that is based primarily on a property tax levy) and a debt service reserve fund.

KEY RATING DRIVERS

OVERALL FINANCIAL STRENGTHENING: The upgrade to 'BBB' from 'BBB-' is a result of consistent improvement in financial performance reflected in robust profitability, liquidity growth, and debt moderation. At the fiscal year ended Dec. 31, 2015 (unaudited interim results), most key metrics measuring profitability, liquidity, and debt compared favorably against the 'BBB' medians.

RELATIONSHIP WITH HCA: Providing further credit stability is a long-standing management agreement with HCA (Issuer Default Rating of 'BB'; Outlook Stable), which brings management expertise and lends certain benefits from size and scale. The current agreement runs through 2017 and is expected to be renewed without material changes.

CRITICAL ACCESS DESIGNATION: Fitch largely attributes Cass's historically stable financial results to the organization's critical access hospital (CAH) designation, which provides favorable reimbursement to small rural facilities.

LIMITED CAPITAL PLANS: Capital spending is estimated at $2.2 million for fiscal 2016, mostly for routine maintenance and upgrades (below half of 2015 depreciation). Combined with projected profitability, continued liquidity growth is expected.

SMALL REVENUE BASE: Cass's small revenue base of $66.3 million in fiscal 2015 (unaudited interim results) poses inherent credit risks including vulnerability to fluctuations in medical staff size, utilization trends, and payor mix.

RATING SENSITIVITIES

SUSTAINED PERFORMANCE EXPECTED: Given Cass's operating platform, CAH designation, and limited capital plans, Fitch expect Cass to sustain strong financial performance and further strengthen its financial cushion.

POTENTIAL LEGISLATIVE CHANGES: Cass is inherently exposed to potential changes in the CAH program, which would likely have a negative impact on financial results. Management does not anticipate any issues with the recertification checklist released by the Centers for Medicare and Medicaid Services in February 2016. Further, should there be major changes to the program, they are likely be implemented with a transition period.

CREDIT PROFILE

Cass Regional Medical Center is located in Harrisonville, MO, approximately 37 miles southeast of Kansas City. Cass is a designated CAH with 25 acute care beds, a 10-bed behavioral health unit, and a level III trauma center. Other entities include family practice clinics and several employed clinicians. Total operating revenues were $66.3 million in 2015.

Stable Operating Platform

Cass derives material benefits from its CAH designation as well as the HCA relationship. The CAH program provides favorable reimbursement levels and some insulation from revenue pressure related to healthcare reform. However, there have been discussions at the federal level that may impact reimbursement levels or program eligibility requirements that may negatively impact Cass. Management has been proactively planning for potential impact from such changes, such as preparing for value based reimbursement, improving patient and staff satisfaction, and maintaining financial strength.

While Cass operates as a standalone CAH, the organization benefits from the management agreement with HCA, which provides access to HCA's expertise on contract negotiations, compliance, recruiting, and strategic planning. Fitch believes this relationship has historically added strength and stability to Cass, as well as access to a broader clinical network in the service area.

Overall volumes have generated stable revenue growth, but the mix continues to shift. Inpatient admissions declined for the second year with sustained rise in observations, and overall patient traffic continues to shift to the outpatient setting. While there has been some market share weakening due to the growing encroachment of Kansas City based providers into Cass's service area, overall volumes support stable operations. Management reports outpatient volume growth has been beneficial to overall financial results, as it tends to have a more favorable payor mix.

Robust Profitability

Profitability has historically been very strong, supported by a combination of stable operations, good expense management, favorable reimbursement from the CAH designation, and receipt of county appropriations. Operating margin averaged 5.9% over the last five fiscal years, and was most recently reported at 7.3% compared to the 'BBB' median of 0.6%. Similarly, operating EBITDA margin averaged 17.7% for five years, and was 18.7% in fiscal 2015 compared to the median of 7.7%.

County appropriations have been steady at approximately $1.8 million a year and are included in other operating revenue. Excluding these funds, 2015 operating and operating EBITDA margins would have been 4.6% and 16.3%. Budgeted operating income for 2016 is $2.7 million before tax revenues (4% operating margin) and $4.8 million after tax revenues (7.1% operating margin), which are very close to 2015 results and Fitch believes is achievable.

Continued Liquidity Growth

Unrestricted cash and investments more than doubled over the last five years, totaling $51.2 million at Dec. 31, 2015. Consistent growth is primarily attributable to robust cash flows and limited capital spending over that period. Days cash on hand of 328, 14.6x cushion ratio, and 112% cash to debt all compare favorably against the 'BBB' medians of 162 days, 11.1x and 89.5%. Cass does not currently have any plans for additional debt.

DEBT PROFILE

Cass has one series of fixed rate bonds outstanding in the amount of $45.5 million with a maximum annual debt service (MADS) of $3.5 million. MADS equated to a high 5.3% of 2015 revenues against the median of 3.6%. However, other measures of capital compare favorably against respective medians largely due to strong cash flows and overall balance sheet position. Debt to EBITDA of 3.5x and 42.2% debt to capitalization are stronger than the respective medians of 4.4x and 48.1%.

Despite a relatively high MADS, coverage has been very consistent, at or above 3x over the last six years and most recently at 3.7x in 2015. Cass is not party to any swaps.

DISCLOSURE

Cass covenants to provide audited financial statements within 150 days after the year-end close and quarterly disclosure within 45 days of quarter close to the municipal securities rulemaking board's EMMA system.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001539

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001539

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com