NEW YORK--(BUSINESS WIRE)--Fitch Ratings has removed from Rating Watch Negative and affirmed the 'A' rating on the following bonds issued by the New Hampshire Health & Education Facilities Authority on behalf of the Dartmouth-Hitchcock obligated group:
--$57.5 million revenue bonds, series 2009;
--$75 million revenue bonds, series 2010.
Dartmouth-Hitchcock obligated group has approximately $570 million of total debt outstanding of which $430 million is comprised of unrated direct bank loans.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group (OG). The OG includes Mary Hitchcock Memorial Hospital and Dartmouth Hitchcock Clinic. Cheshire Medical Center (Keene, NH); Mt. Ascutney Hospital (Windsor, VT); and New London Hospital (New London, NH) were added to the OG effective July 1, 2016. The OG accounted for approximately 98% of total revenues and 99% of total assets of the consolidated entity (Dartmouth Hitchcock Health and Subsidiaries (DH)) as of FY 2016 (June 30 year end). Fitch's analysis is based on the consolidated entity.
KEY RATING DRIVERS
POOR PERFORMANCE IN FY 2016: DH's financial performance in FY 2016 (draft audit) was marked by an unanticipated $12 million operating loss at Mary Hitchcock Memorial Hospital and Dartmouth Hitchcock Clinic. The loss was driven by erroneous revenue recognition following the implementation of a new billing system in October 2015, which had to be reversed during the fourth quarter of FY 2016.
IMPLEMENTATION OF PERFORMANCE IMPROVEMENT PLAN: The removal of the bonds from Rating Watch Negative is based upon DH having implemented a Performance Improvement Plan (PIP) following the operating loss in FY 2016. Operating at a higher revenue base than expected during most of the fiscal year led to a structural imbalance with expenses and a main driver of the PIP is a reduction in costs. The PIP has resulted in breakeven operating performance for Q1 2017 (Sept. 30, unaudited), ahead of targeted budget projections, suggesting that operating stabilization is underway.
WEAKENED LIQUIDITY AND COVERAGE METRICS: Poor operating performance in FY 2016 resulted in liquidity metrics that are very weak for the rating category. Days cash on hand of 115.6 and cash-to-debt of 85.6% at FYE 2016, both compare unfavorably to their respective 'A' category medians of 215.5 and 148.6%. MADS coverage was similarly weak at 1.7x in FY 2016, compared to the 'A' category median of 4.5x.
PUT RISK EXTENDED IN DEBT PROFILE: Approximately 75% of the OG's debt is exposed to put/bank renewal risk. DH refinanced two of its bank loans during FY 2016, which pushed $57 million of debt that was subject to put risk in 2018 and 2019 to 2022. DH does not have any major capital needs or additional debt plans.
STRONG MARKET PRESENCE: DH provides high acuity care to an extensive geographic area through its flagship academic medical center (Mary Hitchcock Memorial Hospital) and its physician clinic (Dartmouth Hitchcock Clinic). DH has a close relationship with the Geisel School of Medicine at Dartmouth College to further its mission in education and research. DH is the largest provider of healthcare services in the state of New Hampshire and the second largest provider of healthcare services in the state of Vermont and continues to pursue strategic affiliations to grow its regional footprint.
NATIONAL LEADER IN FOCUS ON VALUE AND QUALITY: DH is consistently ranked as a top performer in quality and efficiency among large health systems. Its strategic focus is on population health management and transforming payment models to a more value-based system. There are additional collaborations with other providers and payors on various accountable care organizations and narrow network products.
RATING SENSITIVITIES
FINANCIAL STABILIZATION: Fitch expects Dartmouth Hitchcock's consolidated performance to improve with an expectation of at least breakeven performance for the main revenue generating entity, Mary Hitchcock Hospital and Dartmouth Hitchcock Clinic in FY 2017. Failure to improve operating performance or further deterioration in liquidity or coverage metrics would result in negative rating action.
CREDIT PROFILE
DH provides high acuity care to an extensive geographic area through its flagship academic medical center, Mary Hitchcock Memorial Hospital, and its physician clinic, Dartmouth Hitchcock Clinic. Headquartered in Lebanon, NH, DH is the largest provider of healthcare services in the state of New Hampshire and the second largest provider of healthcare services in the state of Vermont. Total revenue in FY 2016 was $1.8 billion.
NATIONAL LEADER IN FOCUS ON VALUE AND QUALITY
DH has consistently demonstrated lower utilization rates in imaging and surgeries compared to national averages, as well as lower Medicare spending compared to national averages. It has been ranked highly by UHC regarding efficiency, which focuses on per case cost performance and length of stay, and the quality of its care ranks among the best in New England, according to Consumer Reports.
The organization is focused on population health management and shifting payment models to be value based versus volume based. DH has been growing its regional footprint and adding community hospitals, which should help decant the main facility, which is at capacity. Other collaborations are in progress to create a wider network that can leverage support services such as information technology and management is interested in managing lives across NH and VT. DH had approximately 270,000 at risk lives in fiscal 2016.
POOR PERFORMANCE IN FY 2016
DH's financial performance for FY 2016 was marked by an unanticipated operating loss of $12 million in the OG, which management attributes to the overestimation of patient revenues due to issues arising from the implementation of new billing and revenue cycle systems. This overestimation of revenue went undetected for most of the year, which Fitch views as concerning; however, there have been management and process changes put in place to address this issue. Management took corrective action around mid-June and estimates that revenues had been overstated by approximately 1% over this time period. This resulted in reducing revenue by about $20 million in the fourth quarter of FY 2016.
In August 2016, Fitch downgraded DH's rating to 'A' and placed the bonds on Rating Watch Negative due to the performance in the FY 2016 unaudited statements. The scope of the operating loss has been confirmed in the draft audited statements which were released to Fitch in November.
On a consolidated basis, DH realized a much larger operating loss of approximately $38 million for FY 2016 (-2.1% operating margin, draft audit), which was largely attributable to a series of one-time expenses at Cheshire Medical Center, as well as the write-off of development costs related to ImagineCare, DH's venture in remote patient care. Fitch does not expect the variance between OG and consolidated performance to remain as significant as it was in FY 2016.
PERFORMANCE IMPROVEMENT PLAN
Management has implemented a PIP for Mary Hitchcock Hospital and Dartmouth Hitchcock Clinic consisting of $80 million worth of both expense cuts and revenue enhancements, in an effort to stabilize its operations. Approximately $32 million of these identified improvements are expected to come from workforce reductions of non-patient care positions, with the balance coming mainly from supply chain and physician productivity initiatives to improve utilization and realize efficiencies across the organization.
The PIP will be implemented throughout FY 2017 with the goal of achieving a $10 million operating income by Q4 2017 (at least breakeven for the full year) and a 2% to 3% operating margin by the end of FY 2018. The PIP has resulted in breakeven operating performance for Q1 2017, ahead of targeted budget projections, suggesting that operating stabilization is underway.
WEAKENED FINANCIAL PROFILE
Negative profitability in FY 2016 resulted in liquidity metrics that are very weak for the rating category. Days cash on hand was 115.6 at both fiscal year-end 2016, as well as at Q1 2017, a decline from 139.1 in FY 2015 and unfavorable to Fitch's 'A' category median of 215.5 days. Cash to debt was 85.6% for FY 2016 and 93.2% in Q1 2017, a decline from 104.2% in FY 2015 and also unfavorable to the 'A' category median of 148.6%.
Fitch used MADS of $36.2 million, which includes the debt of the non-obligated entities. MTI covenants at the DH OG level are calculated based on AADS of $31.5 million. MADS coverage declined to 1.7x in FY 2016 from 2.6x in FY 2015. While this ratio has improved to 3.0x as of Q1 2017, it remains unfavorable to Fitch's 'A' category median of 4.5x.
Due to its weakened financial profile, DH has no flexibility to absorb further operating reversals and remain at its current rating level. Failure of DH to achieve its PIP or further deterioration in liquidity or coverage metrics would result in negative rating action.
DEBT PROFILE
DH's total outstanding debt was $647.6 million as of June 30, 2016, including draws made on lines of credit to counteract the effects of the operating loss. Of the OG debt, 29% is variable rate, however 75% is exposed to put/bank renewal risk. During FY 2016, DH undertook a series of refinancings of its bank loans, which extended all put risk to 2022 from 2018/2019.
DH maintains access to capital, despite its recent operating challenges, and a highly liquid investment portfolio, in which 60% of assets are redeemable on a daily or weekly basis, which Fitch believes mitigate the risk of the organization's high exposure to put/bank renewal risk.
DH's debt burden remains elevated, with debt-to-capitalization of 61.3% as of Q1 2017, which compares unfavorably to the 'A' category median of 36%. DH's large revenue base mitigates concerns about its high debt burden, as MADS represented 1.9% of total revenues for FY 2016, which compares favorably to the 'A' category median of 2.7%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/site/re/866807
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