NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued on behalf of Tufts Medical Center (Tufts):
--$210 million Massachusetts Development Finance Agency revenue bonds series I (2011);
--$100 million Tufts Medical Center taxable bonds, series 2013.
The Rating Outlook is Stable.
SECURITY
A lien on and security interest in the gross receivables of the Obligated Group (OG), which is the medical center, a mortgage interest in certain property and a debt service reserve fund.
KEY RATING DRIVERS
IMPROVING PERFORMANCE TREND: Tufts' OG performance has steadily improved since FY2015 (Sept. 30 year-end), with management reporting strong volumes and cash flow year to date. While the six month consolidated performance shows a negative 2.2% operating margin that has been a result of above budget losses at Tufts' non-OG physician group. Fitch believes that the losses at the physician group can be reduced, with Tufts implementing a turnaround plan, and Fitch expects the consolidated results to return to historical levels over the next two years.
STABLE LIQUIDITY POSITION: Tufts' liquidity metrics remain near or above Fitch's 'BBB' category medians and are a key credit strength at the rating level, providing Tufts with the financial flexibility to address its operating challenges. The Stable Outlook assumes that Tuft's liquidity will remain stable over the next two years.
WEAK FY2015 RESULTS: Tufts posted a negative 1.7% operating margin and a 2.9% operating EBTIDA margin in FY2015. Approximately $20 million in one-time items, including the effects of the harsh 2015 winter and consultant costs, as well as an increase in Medicaid in its payor mix drove the weaker performance. As a result, debt service coverage fell to a low 1.6x, which is below Fitch's expectation of at least 2x coverage.
MANAGEABLE DEBT BURDEN: Tufts' debt burden remains manageable as indicated by maximum annual debt service (MADS) as 2.7% percent of revenue of in FY2015, relative to Fitch's 'BBB' category median of 3.6%. Debt to EBITDA was weaker, reflecting the negative performance, and Fitch expects that to improve.
LARGE PHYSICIAN NETWORK: Tufts employs the majority of its active physicians through its faculty group practice, with those physicians largely specialists. The large number of employed specialists secures Tufts' ability to perform complex tertiary and quaternary services (Tufts' Medicare case index was 2.26x in FY2015). However, it does suppress operating margins. Tufts also has access to a sizable base of primary care physicians through the New England Quality Care Alliance (NEQCA), a physician organization of which Tufts is the sole corporate parent.
LONGER TERM STRATEGY: Fitch continues to believe that Tufts' role as a low-cost, high-quality provider of complex procedures, its sizable physician network, and its participation in Wellforce, which includes collaborating with community hospitals, position it for health care reform. While many of Tufts' operating metrics are below category medians, Fitch believes the strategy will provide for longer term operational stability, in a competitive Boston market.
RATING SENSITIVITIES
IMPROVED PERFORMANCE: The Stable Outlook reflects Fitch's view that Tufts Medical Center's (Tufts) performance will continue to improve over the next two years. However, should Tufts fail to improve its consolidated performance to breakeven and debt service coverage to above 2x, negative rating pressure would be likely.
CREDIT PROFILE
Tufts Medical Center is a 415 licensed bed academic medical center located in downtown Boston adjacent to the Tufts University School of Medicine. In FY2015, Tufts MC reported $915.1 million of total revenues. The rating is based on the consolidated system. In FY2015, the OG comprised 82% of the system's total assets and 75% of its total revenues.
The affirmation of the 'BBB' rating reflects Tufts healthcare reform strategy, manageable debt burden and stable liquidity metrics. Credit concerns include weaker operating metrics and a competitive service area.
CYCLE OF WEAKER PERFORMANCE
In FY2015, Tufts posted a negative 1.7% operating margin and thin 2.9% operating EBITDA. The losses were driven largely by approximately $20 million in one-time expenses. About half of those expenses, or $9.7 million, were a result of the harsh winter of 2015, which caused reduced outpatient revenue and a lower number of inpatient surgeries.
Another $6 million of expenses were related to a consultant engagement to review coding documentation and accounts receivable. The outcomes of that engagement have positively affected FY2016 performance. Lastly, Tufts experienced a shift in payor mix from FY14 to FY15, with Medicaid increasing to approximately 25% of gross revenues from 21%. Tufts management reports this reflected a shift in the overall local healthcare market, as well as an increase in pediatrics and OBGYN volumes, as Tufts has looked to grow these service lines. Pediatric services generally have a higher Medicaid reimbursement rate than adult Medicaid services. Medicaid as percent of gross revenues seems to have stabilized in FY2016.
The thin operating performance has carried over into FY2016, with Tufts' negative 2.2% operating margin consistent with the prior year. However, the OG saw a marked year-over-year improvement in financial results with the positive trend in performance continuing as the fiscal year progresses. The improved OG performance reflects volume growth that has resulted from Tufts' service line investments and physician recruitment in cardiology and general medicine, including the FY2016 arrival of a new chief of cardiac surgery, as well as the continued growth in Tufts' physician groups. As a result, inpatients admissions are up 3% and inpatient surgeries are up 11.5% through the first six months of FY2016.
The driver of the consolidated year to date loss is above budget losses at Tufts' physician group, which have offset the improved performance at the medical center. While these losses are a credit concern, Fitch believes that Tufts will address them in the coming year. Overall, the positive trend in performance at the medical center, coupled with addressable issues at the physician group, support the affirmation, with the Stable Outlook reflecting Fitch's expectation that Tufts will improve its consolidated performance over the next two years.
A key credit strength at the current rating level is Tufts' liquidity. Tufts had unrestricted cash and investments of $370.6 million at March 31, 2016, which equated to 143.4 days cash on hand, a 15x cushion ratio, and 127.6% cash to debt, relative to Fitch's 'BBB' category medians of 161.5 days, 11.1x, and 89.5%, respectively.
WELLFORCE PROGRESSING
Since 2014, Tufts has been a part of Wellforce. Wellforce is a healthcare organization that seeks to achieve the benefits of partnership, such as scale, new technologies, population health initiatives, operational efficiencies and integrated care, while enabling providers to retain significant autonomy to run operations in their local markets. Circle Health, which includes Lowell General Hospital (LGH, general revenue bonds rated 'BBB+' by Fitch) is also a part of Wellforce. To date, integration is progressing at Wellforce between Tufts and LGH. The OGs currently remain separate and that is expected to continue over the outlook period.
Last week Wellforce and Hallmark Health, which is system of hospitals, including in Melrose and Medford, physician practices, and community-based services located in suburban Boston, signed a letter of intent to explore Hallmark Health's joining of Wellforce. This would represent the first new member of Wellforce since its founding in 2014. Hallmark Health's addition to Wellforce would likely provide a number of clinical opportunities for collaboration with Tufts, given Hallmark Health's geographic proximity to Boston.
Debt Profile
All of Tufts' $290.4 million in long-term debt is fixed rate, and Tufts has no outstanding swaps. Fitch views Tufts' conservative debt profile as a credit positive. Tufts MC's debt burden is manageable as indicated by MADS of $24.8 million equating to 2.7% of total revenues compared to the 'BBB' category median of 3.6%.
Historically, the manageable debt burden has enabled coverage metrics to remain consistent with the rating level in spite of a thinner operating metric, and Fitch expects Tufts' coverage to return to that level.
Disclosure
As part of its continuing disclosure agreement, Tufts MC covenants to provide annual audited financial statements within 120 days of each fiscal year-end and unaudited quarterly statement within 60 days of each fiscal quarter-end to bondholders.
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
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