Fitch Affirms Group Health Cooperative (Washington) at 'A-'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on Group Health Cooperative's (GHC) approximately $205.9 million of outstanding series 1991, series 2001 and series 2006 revenue bonds issued through the Washington Health Care Facilities Authority. In addition, Fitch has also affirmed the following ratings:

GHC

--Issuer Default Rating (IDR) of 'A-';

--Insurer financial strength (IFS) rating of 'A'.

Group Health Options, Inc.

--IFS rating of 'A'.

The Rating Outlook on all the ratings is Stable.

The difference between the long-term ratings on GHC's revenue bonds and its IFS rating reflects the subordination of debt obligations relative to policyholder obligations when debt is issued out of a regulated operating company. This is consistent with Fitch's insurance industry notching methodology, which is explained in detail in the insurance section of the Fitch web site at www.fitchratings.com.

The 'A-' rating on GHC's revenue bonds reflects its light debt burden, robust liquidity relative to long-term debt, strong debt service coverage and the benefits of GHC's leading HMO market share position in Washington State. GHC's maximum annual debt service (MADS) of $16.3 million represents a very light 0.6% of fiscal 2007 total revenues. GHC's total long-term debt of $199.7 million was just 1.6 times (x) of fiscal 2007 EBITDA (earnings before interest, taxes, depreciation and amortization) and 18.4% of capitalization.

GHC's position of unrestricted cash and investments has increased 27% since 2005 to $921.2 million at June 30 2008 from $725.0 million (at June 30, 2006) and is almost 5x total long-term debt. GHC's solid historical operating profitability and stable investment returns have generated strong coverage of MADS of 7.8x, 17.8x and 9.8x in fiscal 2007, 2006 and 2005, respectively. GHC has been able use its clinical reputation and patient loyalty to achieve better contract pricing with employer groups. Fitch believes that HMO enrollees tend to be somewhat less price sensitive due to the large number of primary care physicians in the GHC network being exclusive providers.

Primary credit concerns include steady enrollment decline in GHC's core HMO product, its regional concentration, the risks associated with GHC's expansion into point of service and preferred provider contracts, and the rate of growth in contracted medical services. Since 2005, enrollment in GHC's Group HMO declined approximately 2.7%, which reflects the increasing contract choice offered in the market. In response, GHC has been expanding its HMO and POS product offerings and has seen robust growth in its self-funded HMO product line. However, Fitch believes that the greater product choice inherently makes accurate pricing more difficult. The growth in external delivery expenses (i.e. the cost of contracted medical services) has exceeded the growth of total revenues over the last three years. While total revenues have grown 13.4% from 2005-2007, external delivery expenses have climbed 21.5%. To date, management has effectively blunted the negative impact of rising external delivery expenses through effective control of internal expenses. Over time, Fitch believes it may be increasingly difficult for GHC to offset cost increases as a purchaser of health services through expense control of its owned and operated services.

GHC is a not-for-profit membership corporation operating as a health maintenance organization. GHC operates an integrated health care delivery system providing coverage throughout most of Washington State and northern Idaho through owned and contracted services providers. In 2007, GHC had approximately 575,367 members in all health plans and total operating revenues of $2.6 billion. GHC covenants to disclose quarterly and annual disclosure to bondholders.

Fitch rates the following bonds 'A-':

--$99,960,000 Washington Health Care Facilities Authority revenue bonds, series 2006 (Group Health Cooperative);

--$62,482,000 Washington Health Care Facilities Authority revenue bonds, series 2001 (Group Health Cooperative);

--$42,950,000 Washington Health Care Facilities Authority revenue bonds, series 1991 (Group Health Cooperative).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.