NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed approximately $286.2 million of Denver Health and Hospital Authority, CO's (Denver Health) series 2007A&B, 2009A, 2010, and 2014A&B bonds at 'BBB+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the gross revenues of the obligated group and a debt service reserve fund.
KEY RATING DRIVERS
ESSENTIALITY IS KEY CREDIT STRENGTH: Denver Health is an essential health care services provider in the Denver metropolitan area. It is the city's safety net hospital and public health system, providing care for approximately one-third of Denver's residents and children.
HIGH RELIANCE ON GOVERNMENT FUNDING: Denver Health's challenging payor mix is heavily dependent on governmental sources, safety net reimbursement and supplemental funding, which may be susceptible to funding cuts. However, Fitch believes Denver Health's vital role as the provider of critical public health services to vulnerable populations will ensure that it continues to receive sufficient level of funding needed to provide these essential services.
STRENGTHENING PROFITABILITY: Operating profitability improved in 2014 and 2015 primarily due to increased revenue from Medicaid expansion and a decrease in the uninsured population due to the Accountable Care Act (ACA). Denver Health's improved operating margins are a direct result of healthy revenue growth of 12.2% in 2014 and 8.3% in 2015. Fitch expects the results in 2016 will be slightly weaker, a trend that has already begun to be reflected in the first quarter of the fiscal year primarily due to a reserve for future disproportionate (DSH) pay-back.
CAPITAL SPENDING WILL TEMPER LIQUIDITY GROWTH: Capital spending increased in 2016 and is expected to increase again in 2017 and 2018, which will be funded largely from operations. Elevated capital spending will require sustained cash flows so as not to reverse the improvement in liquidity reserves in 2014 and 2015. Unrestricted cash and investments grew substantially to $319 million (131.1 days cash on hand (DCOH)) as of fiscal year-end 2015 from $155 million at fiscal year-end 2013 (75.8 DCOH), although still light relative to category medians.
EXPERIENCED MANAGEMENT TEAM: Denver Health has a seasoned management team that has been able to improve financial results through expense discipline while managing a diverse operation and positioning Denver Health for future growth. There is some uncertainty caused by the recent retirement of the CEO and the ongoing search for a permanent replacement.
RATING SENSITIVITIES
STABILITY AT THE CURRENT RATING WITH CAPITAL PLANS: The strong profitability and cash growth through the end of fiscal 2015 has provided Denver Health with financial flexibility to pursue its planned capital expansions. The current rating and outlook incorporates Fitch's expectation that the capital spending will prevent further cash growth and that profitability will be less robust in 2016.
CONTINUED PROFITABILITY: Positive rating momentum is possible if Denver Health can sustain profitability and coverage at the levels realized in 2014 and 2015 while further growing liquidity and successfully executing its capital plans.
CREDIT PROFILE
Denver Health is an integrated health care delivery system with an extremely broad operating platform in the Denver metropolitan area. In addition to Denver Health Medical Center, a 525 licensed (417 staffed) bed acute care hospital, Denver Health operates the city's public health system, the Rocky Mountain Center for Medical Response to Terrorism, the Rocky Mountain Regional Trauma Center, an HMO, a Medicaid Choice managed care plan and a network of federally qualified health centers. Denver Health's essential role in the Denver metropolitan area is highlighted by the fact that it provides healthcare services to approximately one-third of Denver's residents and approximately 34% of Denver's children.
Fitch's analysis is based upon Denver Health's consolidated financial statements. Denver Health's consolidated operating revenue equaled $964 million in 2015.
IMPROVED PROFITABILITY AND LIQUIDITY
Operating profitability strengthened in 2014 and 2015 due to the benefits of expanded coverage under the ACA, Medicaid expansion in Colorado, and operational improvement initiatives. These initiatives include productivity improvement (including the implementation of a flexible staffing model and staffing reductions), clinical documentation improvement, tight cost control in each department and efforts to ensure best pricing from third parties. While Denver Health actively monitors the cost of providing services to patients, the improved operating margins of 4% and 3.8% in 2015 and 2014, respectively, were directly related to the revenue growth from the ACA expansion and increased utilization, particularly on the outpatient side. As the benefits of the ACA expansion begin to mature, however, Fitch expects that profitability will not be as robust in 2016 and 2017. The operating margin of 0.6% for the first quarter of 2016 (ended March 31) already trailed the 3.4% margin for the comparable period in 2015. This was primarily due to reserves required for potential pay-back of disproportionate share (DSH) revenue as Denver Health's care to the uninsured decreased over the past couple of years.
Future profitability is limited by a payor mix that has a high degree of governmental funding exposure. Medicaid accounted for a high 51.7% of gross revenues in fiscal 2015, up from 34.9% in 2013, driven by the ACA expansion while the uninsured dropped to 11.9%. The high Medicaid exposure is reflective of Denver Health's role as a safety net provider for the medically indigent and uninsured. Total supplemental funding (net of provider fee expense) decreased to $99.8 million in fiscal 2015 from $107 million in fiscal 2014, and management expects this to decrease again in 2016 due to reduced DSH payments for indigent care in the future.
The improved cash flow in 2014 and 2015 allowed Denver Health to bolster its unrestricted cash reserves. Liquidity metrics at year-end 2015 reflect significantly improved DCOH of 131.1 days, 13.0x cushion ratio, and 92.2% cash to debt. These metrics weakened in the first quarter of 2016 to 107.2 DCOH, 11.6x cushion ratio and 81.7% cash to debt as they have in prior first quarters reflecting the practice of paying certain payables after year-end. Overall, the improved cash position for Denver Health will provide an important cushion for the larger capital budgets that are planned at this time.
CAPITAL PLANS
Denver Health's five-year capital plan (2016-2020) calls for $448 million of investment, which is derived from a number of sources. These sources include $36 million from the 2014 bond proceeds, contributions from the City and County of Denver, proceeds from the sale of an administrative building, a possible City of Denver general obligation (GO) bond issuance, and the remainder expected to be funded through cash flow. Major capital projects include implementation of a new IT system in 2016, a new outpatient clinic, a new administrative services building at 601 Broadway, and a new ambulatory care center that is included in the 2017 and 2018 capital budget. The proposed 272,000 square foot ambulatory care center is projected to cost approximately $150 million and would house a comprehensive array of ambulatory services on the main campus and connect to a new parking garage. Denver Health is in discussion with the city to possibly fund half of the ambulatory care center with a city GO bond that would have to be approved by voters. If the funding does not materialize, Denver Health may reconsider its current plans.
The ambulatory care center and other renovations in the master plan are part of a strategic move to continue to expand outpatient service offerings, make the campus more attractive, and address parking concerns to improve the patient experience. Denver Health's ultimate goal is to increase its appeal to commercially-insured patients while still continuing to serve its vital role as the safety net provider for the Denver area.
LIGHT DEBT BURDEN; NO PLANNED ISSUANCE
The combination of Denver Health's improved operating profitability and light debt burden has been generating solid maximum annual debt service (MADS) coverage based on MADS of $24.6 million. MADS coverage by EBITDA and operating EBITDA equaled 4.1x and 3.8x, respectively, in 2015, comfortably above Fitch's respective 'BBB' category medians of 2.7x and 2.4x.
Total debt outstanding was $347.5 million as of March 31, 2016, most of which is fixed rate. Denver Health's fixed payor swap was marked to market at negative $17.7 million as of March 31, 2016. The swap does not require collateral posting as long as Denver Health's rating is 'BBB-' or above.
In 2015, Denver Health implemented GASB Statement 68 and as a result is now reporting a liability of $94.5 million for its share of the net pension liability at the Denver Employees' Retirement Plan (DERP). Denver Health participates in DERP through a defined benefit plan for employees hired at Denver Health prior to January 2001.
DISCLOSURE
Denver Health covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of the end of the first three fiscal quarters and within 60 days of the end of the fourth fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Denver Health's disclosure practices are excellent, consisting of a detailed management discussion and analysis, balance sheet and income statement, utilization statistics and other supplemental material.
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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004473
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