Fitch Affirms Dickinson County Healthcare System, Michigan Hosp Revs at 'BBB-'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB-' rating on about $27.6 million Dickinson County Healthcare System (DCHS), County of Dickinson, State of Michigan, hospital revenue and refunding bonds, series 1999. The Rating Outlook is revised to Negative from Stable.

The Negative Rating Outlook is based on dramatically reduced operating profitability caused by declining inpatient volumes. Through the first six months of fiscal (FY) 2009, acute discharges and patient days dropped 9.4% and 14.7%, respectively. Total outpatient volumes are also slightly down from the prior six-month period. The volume declines may be attributed to the effects of the softer economy and heightened outmigration to Wisconsin hospitals. While expenses are flat, operating revenues dropped 2% during the period ended June 30, 2009 versus the prior year. As a result of the revenue declines, rising bad debts, and adverse payor mix changes, the six-month period operating margin fell to negative 5.0%, from 0.8% during FY 2008. Additionally, the operating EBIDTA margin dropped to 4.3% during the same six-month period, down from 8.3% in FY 2008. Employed physician practices remain a challenge after $1.6 million of losses in FY 2008 and another $1 million loss through the first six months of FY 2009. Management is considering a variety of strategic alternatives to address its physician practice operations.

Furthermore, management recently instituted a hiring freeze and an early retirement program. Cost savings from the early retirement program are not expected to benefit performance until FY 2010. On the revenue and volume front, DCHS recently instituted a hospitalist program that is designed to better support its employed primary care physicians and encourage referrals by providing enhanced medical management. If DCHS is unable to stem the operating losses or if liquidity measures suffer, a Fitch downgrade into the 'BB' category is likely.

Factors supporting the 'BBB-' rating include DCHS's dominant market share and sole community provider status, stabilized liquidity, and a relatively new physical plant. DCHS has a dominant market share of about 62% in its primary service area and is designated a sole community provider as its closest competitor is approximately 30 miles away. However, Bellin Health of Green Bay, WI purchased a seven-member physician clinic in Iron Mountain, increasing competition for certain outpatient and ancillary services and leading more patients to seek secondary care services outside of DCHS. To protect its market presence, DCHS strengthened its partnership with Marquette General Health System (also located in Michigan's Upper Peninsula), by entering into a three-year affiliation agreement for certain administrative services and clinical programs. Fitch views this partnership favorably as DCHS is aligning itself with a larger and more influential Michigan-based health care provider that could potentially lead to improved relations with its physicians and largest health plan, Blue Cross Blue Shield.

DCHS's unrestricted cash and investments increased to $17.3 million or 91 days of operating expenses at June 30, 2009, from $14.6 million or 77.5 days of operating expenses in FY 2008. Liquidity is up due to better accounts receivable collections following a successful system conversion and the deferral of certain capital expenditures. Days in accounts receivable fell to a more manageable 52 days as of June 30, 2009, a 12-day improvement in just six months. Management anticipates capital outlays to be lower than in prior years, but the reduced spending should not place them at a competitive disadvantage, since their new hospital opened in 1996 and investments in digital imaging and electronic medical records have been strategic in nature. Despite the lower capital expenses in 2009, DCHS had a low average age of plant of 7.7 years, which compares favorably with Fitch's 'BBB' category median of 10.4 years. Nonetheless, prolonged underinvestment in facilities and technology could become a rating factor.

Other credit concerns include DCHS's moderately high debt position and its small business base in an economically shallow service area. DCHS has a moderately high debt position with 4.5% maximum annual debt service (MADS) as a percentage of revenue and 58.4% debt to capital, which compares unfavorably to Fitch's 'BBB' category medians of 3.5% and 49%, respectively. DCHS's small size makes it susceptible to volume fluctuations, physician turnover, and health plan contracting items, which is evidenced by the poor operating performance in the current fiscal year. Furthermore, its revenue concentration to Blue Cross Blue Shield (25% of gross revenues) and Medicaid (9.5% of gross revenues) leave DCHS vulnerable to reimbursement modifications or payment reductions. Dickinson County's economic base is small with only about 12,800 jobs and a 12.6% unemployment rate as of July 2009. The county lost about 500 jobs (with about 300 job losses coming from a closed paper mill) in the current year, causing unemployment to increase from 2008's 7.1% rate.

DCHS is a 96-bed hospital providing primary and secondary services located in Iron Mountain, on Michigan's Upper Peninsula. Total revenues in 2008 were $78.5 million. DCHS covenants to provide annual disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Disclosure to Fitch has been timely and extremely thorough and has occurred quarterly. Additionally, the disclosure provided by DCHS is one of the best for any obligor in Fitch's nonprofit health care portfolio. The disclosures include a detailed management discussion and analysis, balance sheet, income statement, statement of cash flows, and utilization statistics; all of which have comprehensive comparative analyses.

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