NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the approximately $125 million Washington Health Care Facilities Authority series 2015 and 2009 revenue bonds issued on behalf of Central Washington Health Services Association (dba) Central Washington Hospital (CWH).
The Rating Outlook is Stable.
SECURITY
Gross revenue pledge and mortgage pledge of the obligated group, which only consists of CWH. CWH is part of Confluence Health (CH) and accounted for 83.5% of CH's total assets and 47.3% of CH's total revenue in fiscal 2015 (Dec. 31 year end). Fitch's analysis is based on CWH and CH. The remaining series 2009 bonds have a debt service reserve fund.
KEY RATING DRIVERS
SUSTAINED PERFORMANCE DUE TO AFFILIATION: CWH's financial performance continues to be strong since the affiliation with the major multi-specialty physician clinic in town, Wenatchee Valley Medical Center (WVMC). The affiliation with WVMC resulted in the formation of CH, which began operations on Jan. 1, 2013. WVMC operated a 20 bed hospital, Wenatchee Valley Hospital (WVH), and several outpatient clinics, which were transferred to CH. The operations within CH started in July 2013. The affiliation aligns the goals of these healthcare entities, which should allow for better coordinated and cost effective care as well as a rationalization of services and capital spending. CH's financial profile is also in line with the rating level.
EPIC FINANCING: The organization is in the process of implementing a common electronic medical record (Epic). The budget for this project has increased since Fitch's last rating review in April 2015 due to configuration changes, which will allow future affiliates to connect to CH's IT platform. The total cost of the project is now $44 million. CH entered into a $25 million lease financing (CWH is a guarantor on the debt) to fund a portion of the cost, which greatly impacted MADS since the debt has a short maturity of seven years. CWH's MADS increased to $12.7 million from $8.3 million, but debt service coverage still remains adequate at 3x for 2015.
CONTINUED STRONG CASH FLOW: CWH has had consistent good operating cash flow over the last four years due to the realization of the benefits from the affiliation, which have been evident in its volume trends as well as an improved payor mix due to Medicaid expansion. Operating EBITDA margins were 11.9% in 2015, 13.5% in 2014 and 13.3% in 2013 compared to the BBB category median of 7.7%.
STABLE LIQUIDITY: CWH's unrestricted cash and investments totaled $108.6 million at March 31, 2016 and was relatively unchanged from the same prior year period. Liquidity metrics are in line with the rating category with 142 days cash on hand and 87.1% cash to debt at March 31, 2016. Liquidity should continue to improve post Epic implementation with manageable capital needs.
DOMINANT MARKET POSITION: CWH benefits from a dominant market position with inpatient market share of over 78% in its primary service area. The organization is focused on growing its footprint through ambulatory sites, reducing outmigration, and increasing regional relationships. CH and Samaritan Healthcare (second leading provider in secondary service area) announced plans to affiliate; currently, a memorandum of understanding (MOU) is in place.
HIGH GOVERNMENTAL EXPOSURE: CWH's payor mix has high exposure to Medicare and Medicaid, which accounted for 73% of gross revenues in 2015. However, self pay has declined to only 1.1% of gross revenues in 2015 from 4% in 2012 due to Medicaid expansion.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE: Fitch expects Confluence Health and Central Washington Hospital to sustain its financial performance and continue to benefit from the affiliation after a dip in performance in 2017 due to one-time costs associated with the Epic implementation. A prolonged period of depressed performance or poor execution of the Epic implementation could cause downward rating pressure.
CREDIT PROFILE
CH, WVMC, and WVH entered into a Master Affiliation Agreement on Jan. 1, 2013. CH is the sole corporate member of CWH and WVH. The hospitals contract with WVMC for physician services under a professional services agreement. WVMC's goals are further aligned with CH through a co-management agreement that includes an annual incentive payment related to contributions to the overall success of CH, quality, patient satisfaction, and financial measures. The master affiliation agreement has an initial termination date of Dec. 31, 2017, which automatically renews for two additional terms of five years each, unless otherwise terminated. Fitch does not expect the affiliation to terminate given the benefits achieved to date and the continued integration efforts underway.
CH includes the 198-staffed bed CWH (176 acute and 22 skilled nursing beds), 20-bed WVH (11 acute and nine acute rehab beds), and 11 outpatient clinics. WVMC includes approximately 250 physicians. CWH is located in Wenatchee, Washington, approximately 150 miles east of Seattle and 170 miles west of Spokane. In fiscal 2015, CWH had approximately $295 million of total revenue and CH had approximately $623 million of total revenue. CH, WVH, and WVMC are not obligated to pay debt service on CWH's outstanding bonds.
Continuation of Realization of Benefits from Affiliation
CWH's strong operating performance to date reflects the continued benefits from the affiliation that resulted in a coordination of resource allocation, which Fitch believes is critical in the changing healthcare environment. Management has been focused on optimizing the capacity of the system, eliminating duplication of services, implementing lean methodology and a common EMR. Ongoing performance improvement initiatives include outpatient productivity, charge capture, product standardization, contract consolidation, expansion of 340b drug purchasing program, and labor productivity.
Growing Market Footprint
CWH maintains a dominant market position in its primary service area. CH has been expanding its geographic footprint especially in its secondary service area with additional outpatient clinics as well as an on-site clinic at a local employer. CH has been in affiliation discussions with Samaritan Healthcare and a MOU was signed in May 2016 outlining the governance and financial terms of the affiliation. Samaritan Healthcare is a hospital district with taxing ability and had $75 million in total revenue in fiscal 2015 (Dec. 31 year end). The hospital is the second leading provider in CWH's secondary service area and is located in a fast growing county. Fitch will assess the impact of the affiliation on CWH's rating if and when it is finalized.
Epic Financing
Fitch views the benefit of a common IT platform across the organization favorably although there will be near-term pressure on the financial profile as one-time costs are absorbed. The total cost of the project is now $44 million with $38 million in capital costs and $6 million in operating costs (mostly in 2017). The $25 million Epic financing had a fairly sizeable impact on CWH's debt profile due to the short amortization with a final maturity in 2023. MADS increased to $12.7 million from $8.3 million. CWH's debt service coverage was reduced to 3x from 4.5x in 2015 and 3.2x from 4.9x in 2014.
The debt profile is 100% fixed rate with no swaps. Total debt is approximately $144 million.
Epic is CWH's only major capital investment after the May 1, 2011 opening of a new five-story 176-bed patient tower ($122 million). CH's total capital needs are $44 million in 2016, $37 million in 2017, and $25 million in 2018. Liquidity metrics are projected to improve post Epic implementation due to more moderate ongoing capital spending needs.
Sustained Solid Cash Flow
CWH has maintained solid operating cash flow over the last four years. CWH's operating and operating EBITDA margins were 5.4% and 11.9%, respectively in 2015 compared to 5% and 13.5% the prior year, exceeding the respective 'BBB' category medians of 0.6% and 7.7%. Strong performance continues to be attributed to very strong volume growth due to the coordination of resources and aligned goals of the CH entities. CH's operating and operating EBITDA margins in 2015 were 2.8% and 6.3%, respectively.
CWH's fiscal 2016 budget is for a 5.2% operating margin and CH's operating margin budget is 3%, which Fitch believes is achievable. Financial performance for the organization is projected to dip in 2017 due to the Epic implementation and rebound in 2018 to stronger performance compared to historical levels.
Disclosure
CWH covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end for the first three quarters and within 60 days of the fourth quarter.
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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005689
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