CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on approximately $183.6 million of bonds issued by the State of Ohio on behalf of Summa Health System (Summa) to 'A-' from 'BBB+'.
The Rating Outlook is revised to Stable from Positive.
Bond payments are secured by a pledge of the accounts and general intangibles of the obligated group.
KEY RATING DRIVERS
SOLID LIQUIDITY: The upgrade to 'A-' reflects Summa's solid liquidity, light debt burden and solid coverage metrics. With 218.7 days cash on hand, 27.4x cushion ratio and 193.1% cash-to-debt, liquidity metrics exceed Fitch's 'A' category medians of 199.2 days, 17x and 131.2%.
IMPROVED PROFITABILITY: After decreasing to 6.7% and 7.0% in fiscal years 2012 and 2013, respectively, and a slow start to fiscal 2014, operating EBITDA margin increased to 7.4% in fiscal 2014, excluding non-recurring items. Operating EBITDA margin decreased to 5.1%% in the four-month interim period ending April 30, 2015 (the interim period); however, this represents an improvement from the prior years' 4.8% margin and management expects profitability to improve throughout the year.
LIGHT DEBT BURDEN: Summa's debt burden remains light with maximum annual debt service (MADS) equal to 2.0% of operating revenues in fiscal 2014, allowing for solid MADS coverage by operating EBITDA of 3.7x in fiscal 2014 and 3.0x in the interim period despite the compressed profitability.
STRONG MARKET POSITION: Summa's leading market share and broad operating platform, including a large employed physician group and a health plan with capitation experience, provides credit stability and should provide a strong base for implementation of health care reform initiatives.
SUSTAINED CASH FLOW: Fitch expects that Summa's compressed operating profitability through the interim period will improve throughout the year and beyond resulting in MADS coverage consistent with Fitch's 'A' category medians.
Summa is an integrated delivery system headquartered in Akron, OH. Operations include five hospitals (three of which are wholly owned), outpatient facilities, a physician multi-specialty group with approximately 300 employed physicians, and a health plan with over 240,000 members (SummaCare). Total consolidated revenues equaled $1.47 billion in fiscal 2014.
HealthSpan Partners (HSP), a secular auxiliary organization of Mercy Health (fka Catholic Health Partners, rated 'AA-' by Fitch), purchased a 30% minority stake in Summa for $250 million in September 2013. Simultaneous with the closing of the minority investment, the number of members serving on Summa's board of directors was reduced from 26 to 16, including five members appointed by HSP. Fitch views the minority investment favorably as the partnership should provide for near-term and long-term benefits amongst the two system's hospital operations and health plans.
Following a routine Medicare audit, SummaCare was subjected to Medicare sanctions effective Aug. 11, 2014. As a result, SummaCare was excluded from participating during Medicare open enrollment in fall 2014 and could not actively market itself to new beneficiaries. The sanctions were largely due to the decisions and appeals process related to SummaCare's Medicare Advantage Prescription Drug Plan. Medicare cited that many of the issues stemmed from the ineffective monitoring and oversight of SummaCare's pharmacy benefit manager, which is responsible for coverage determinations.
SummaCare implemented a remediation plan and sanctions were lifted in March 2015 after Medicare determined that the deficiencies were corrected and are not likely to re-occur. Despite the sanctions, SummaCare has been one of the highest rated plans on Medicare's quality rating scale, receiving 4.5 stars out of 5 in 2014 and 4.0 stars out of 5 in early 2015, reflecting patient experience, complaints, drug pricing, patient safety and management of chronic illnesses. The sanctions pressured interim period profitability due to lost premium revenue and increased costs related to the remediation plan.
Unrestricted cash and investments increased 9.6% since December 2013 to $803.4 million at April 30, 2015. Summa's liquidity metrics are solid for the 'A-' rating with 218.7 days cash on hand, 27.4x cushion ratio and 193.1% cash-to-debt, and compare favorably to Fitch's 'A' category medians of 199.2 days, 17x and 131.2%, respectively. Unrestricted liquidity increased in September 2013 due to the $250 million minority investment.
Fitch does not expect liquidity metrics to be materially impacted by capital plans in the near term. However, management is currently reviewing several capital projects which Summa may pursue over the next two to five years.
Despite a slow start in the first quarter, operating profitability improved throughout fiscal 2014 with operating and operating EBITDA margin increasing to 3.0% and 7.9%, respectively. Operating profitability was bolstered by approximately $17 million of non-recurring revenue recognized from the sale of Summa's share of its Crystal Clinic Orthopedic Center joint venture. The benefit was partially offset by approximately $9.3 million of non-recurring severance payments in fiscal 2014. Excluding the non-recurring items, operating and operating EBITDA margins equaled 2.5% and 7.4%, respectively, relative to Fitch's 'A' category medians of 2.5% and 9.5%.
Interim period profitability was negatively impacted by lost premium revenue and increased costs associated with Medicare sanctions. Operating and operating EBITDA margins decreased to 0.2% and 5.1%. However, management expects operating margin to increase to approximately 1% to 1.5% by fiscal year end.
Summa continues to implement a performance improvement plan which initially targeted $100 million in annual operating improvement. The plan was subsequently increased to $150 million per year by fiscal 2016 due to the expected benefits of the HSP transaction. Major initiatives include revenue cycle, length of stay reduction, and supply chain and labor productivity improvements. Management has achieved approximately $100 million in annual savings to date and is reportedly on track to achieve the entire $150 million by fiscal 2016.
LIGHT DEBT BURDEN
The system's debt burden remains light with MADS equal to 2.0% of operating revenue in fiscal 2014. Excluding the non-recurring items MADS coverage by operating EBITDA and EBITDA of 4.2x and 3.7x, respectively, exceeded Fitch's 'A' category medians of 3.8x and 3.1x. Despite the decreased profitability in the interim period, MADS coverage by EBITDA and operating EBITDA of 3.4x and 3.0x remained solid for the rating category, reflecting the benefit of Summa's light debt burden.
Several capital projects are currently under consideration which may involve the issuance of additional debt in 2016 or 2017. Fitch will assess the impact of any additional debt as plans become more certain.
Summa's leading market share and broad operating footprint lend stability to its credit profile. The broad operations, including a highly aligned employed physician group and a health insurance plan, should position Summa well for implementation of healthcare reform and population health management initiatives. Including joint ventures and affiliates, Summa maintained a strong leading primary service area (PSA) market share of approximately 50% in 2014. PSA market share decreased from 57% in 2013, due to the sale of Summa's share of the Crystal Clinic joint venture.
Summa had approximately $416 million of total debt outstanding at April 30, 2015, composed of approximately 72% underlying fixed-rate bonds and 28% underlying variable-rate bonds. The variable-rate bonds were directly placed with various banks in 2014, thereby eliminating renewal and remarketing risks. The system is counterparty to three fixed payor swaps, a basis swap and a constant maturity swap, converting 100% of Summa's variable-rate bonds to a synthetic fixed rate. No collateral was required to be posted at March 31, 2015.
Summa covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA System.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form