Fitch Rates Memorial Hospital at Gulfport’s (MS) 2016 Revs ‘BBB’

Fitch Ratings has assigned a ‘BBB’ to the following City of Gulfport, Mississippi bonds issued on behalf of Memorial Hospital at Gulfport (MHG):

–$60.0 million hospital revenue bonds series 2016A.

In addition, Fitch downgrades the following ratings to ‘BBB’ from ‘A’:

–$59.6 million hospital revenue bonds series 2001A.

The Rating Outlook has been revised to Stable from Negative.

The series 2016 bonds are expected to be issued as fixed-rate bonds. Bond proceeds will refund MHG’s series 2001A bonds and pay costs of issuance. The bonds are scheduled to sell via negotiated sale during the week of May 16, 2016.

SECURITY

The bonds are secured by a pledge of net revenues of the obligated group.

KEY RATING DRIVERS

SHARP DECLINE IN LIQUIDITY: The downgrade to ‘BBB’ is primarily driven by the hospital’s diminished cash position after two years of high capital investments and the installation of a fully integrated electronic health record (EHR) system that resulted in an unfavorable increase to accounts receivable. MHG had $74.5 million in unrestricted cash and investments as of March 31, 2016, equating to 60.4 days cash on hand (DCOH), down from 94.9 days at fiscal end 2014 and 153.6 days at fiscal end 2013.

WEAK PROFITABILITY TRENDS WITH IMPROVEMENT IN 2016: MHG has not generated an operating profit over the past four fiscal years, primarily as a result of reimbursement pressures from a payor mix that is highly reliant on governmental payers and supplemental funding for indigent care. The weak cash flow trend supports the downgrade to ‘BBB’ as the operating results are more in line with the lower rating category. The hospital has benefited from stronger utilization trends in fiscal 2016, resulting in a return to profitability with a 0.4% margin.

LOW AND CONSERVATIVE DEBT PROFILE: MHG’s low debt burden and ample debt service coverage continues to offer strong bondholder protection. Debt to capitalization is considerably low at 21% when measured at the six month period of fiscal 2016 (March 31). With the 2016 refinancing, the maximum annual debt service (MADS) is expected to decrease to $7.8 million from $9.4 million, yielding strong MADS coverage of 5.2x for the six months of 2016 and 3.3x based on fiscal 2015 results.

LEADING MARKET POSITION: MHG maintains a stable solid leading market share of 58% in its primary service area of Harrison County. With its comprehensive array of healthcare services, Level II trauma designation and a wide ambulatory regional presence, MHG is an essential provider of healthcare in this area. The new patient tower and neonatal intensive care unit (NICU) expansion will continue to solidify its reputation and competitive position in the market.

RATING SENSITIVITIES

STABILITY AT THE ‘BBB’ LEVEL: Fitch expects that Memorial Hospital at Gulfport (MHG) will continue to rebuild its liquidity in fiscal 2017 when the construction is completed and the improved collections of the outstanding accounts receivable return to an improved level. Given the challenging payor environment for the hospital, Fitch expects a sustainable, but modest, long-term improvement in cash flow generation, which will also contribute to liquidity growth.

CREDIT PROFILE

MHG is a 445-licensed (305-staffed) bed hospital in Gulfport, MS. It is jointly owned by the City of Gulfport and the Gulfport-West Harrison County Hospital District. It operates the largest civilian hospital in its primary service area of Harrison County and is positioned as the predominant safety net provider.

The hospital is the sole obligor on the bonds, and contributes materially all assets and revenues of the consolidated entity. Fitch’s analysis is based on a consolidated basis, which corresponds with audited financial statements.

MIXED BALANCE SHEET INDICATORS

MHG’s balance sheet reflects mixed balance sheet indicators with diminished cash flexibility but favorable low debt burden. Unrestricted cash decreased rapidly between fiscal year end 2013 and year end fiscal 2015 from $157.5 million to $61.9 million as a result of the construction of the new patient tower and billing delays that began with the installation of an EHR system in June 2014.

The new patient tower addition that began in 2013 includes two new patient floors, the renovation of two existing floors and a NICU expansion that opened in August 2015, consisting of 23 beds in 11-semi private rooms. The last floor of the renovation will be completed by Dec. 2016 and the total cost of the entire project was $70 million. Most of the project expenses ($63 million) were incurred in fiscal 2014 and 2015. All capital expense at the hospital has been fully funded with cash reserves.

Simultaneously, the hospital implemented a new integrated EHR system in June 2014 that went live with 62 systems at the same time (hospital, clinics, billing, and other areas). The new EHR platform, with a total cost of over $45 million, has allowed the hospital to access a comprehensive view of its patient records and facilitates clinical collaboration; however, it also resulted in unexpected delays in the timely billing for services. Before the implementation, MHG had accounts receivable days of 78 days at fiscal year-end 2013, which increased to 102 days at year-end 2015. That metric has started to decrease in fiscal 2016 and stood at a much improved 87 days (net patient accounts receivable decreased from $121.3 to $113.2 million) as of March 31. Management expects the number to be down to at least 83 days accounts receivable days by fiscal year end and to achieve 78 days (the level before the EHR implementation) during fiscal 2017.

Fitch expects that with the new information system and improved coding and collection, MHG should be able to lower the days accounts receivable to levels below 78 days and closer to the 50.6 day median for the BBB category. However, MHG will continue to likely have higher receivables than the median given its reliance on governmental and supplemental funding. The increased patient collections year to date has already translated into an improved cash position with cash levels increasing by $14.7 million in the first six months of 2016.

IMPROVING PROFITABILITY

MHG has been improving its profitability in the current fiscal 2016 after years of posting modest losses from operations. It expects to close out fiscal 2016 with a gain of just over $1 million. The improvement is directly related to a 9.7% increase in net patient revenue from utilization growth derived through MHG’s solid market position and regional ambulatory network of 85 clinics and aligned, mostly employed, medical staff. The hospital also had 9.8% revenue growth in 2015 but did not break-even from operations primarily because of higher labor expense related to the ongoing EHR effort. Fiscal 2016 is expected to be the first year in a trend of improving operations at the hospital.

Fitch expects that MHG’s profitability will continue to be tempered by a challenging payor mix. The hospital is considering strategic partnerships or alternatives for some of the programs that are more reliant on governmental payors. The hospital’s mix is about 52.5% Medicare, 13.1% Medicaid and 9.9% self-pay (Mississippi did not expand Medicaid under the Affordable Care Act). Like other providers, MHG has experienced decreasing unit payments for Medicare and Medicaid, but it receives approximately $21 million in disproportionate share payments, $13 million in provider tax and approximately $23 million from the new Mississippi Hospital Access Program (MHAP) which replaced the Upper Payment Limit Program (UPL) as of July 2015. MHG, along with other Gulf providers, is appealing the formula used by the state to calculate supplemental funding which it believes should be higher. Supplemental payment accrual assumptions in the income statements are based on the more conservative calculation used by the state of Mississippi.

DEBT PROFILE

MHG had approximately $72.8 million in long-term debt, including a 7.4 million note payable outstanding as of March 31, 2016. MHG maintains a conservative debt profile with all fixed rate debt and no interest rate agreements. The series 2016 bonds are expected to refund the series 2001A bonds, generating significant interest rate savings and a reduction in $1.6 million reduction in MADS to $7.8 million.

The hospital has a defined benefit pension plan that was frozen to new entrants as of Jan. 2012. As of Sept. 30, 2015 the hospital reported a liability of $42.6 million, representing a low 68% funded level for the plan.

DISCLOSURE

MHG covenants to provide annual operating statistics and audited financial statements within 120 days and quarterly financial disclosure financial statements within 60 days to the Municipal Securities Rulemaking Board’s EMMA system. Disclosure has been thorough, with good access to management.

Additional information is available at ‘www.fitchratings.com‘.