Friday, July 20, 2012

Hospital’s credit rating downgraded

By Nick Tabor, New Era Senior Staff Writer
Because of decreases in business, a small revenue base and a large debt load, a rating agency downgraded the bond credit rating of Jennie Stuart Medical Center this week from BBB+ to BBB.
This means the hospital may have to pay a higher interest rate if it needs to borrow money in the near future.
But Sam Brown, Jennie Stuart’s vice president of financial services, said it won’t affect rates the hospital pays on current loans.
“It really has no impact on our financials at all, currently,” Brown said Thursday. “It’s a little disappointing that we had the downgrade, but it’s happening to a lot of hospitals around the country.”

In addition to the reasons Fitch Ratings cited in its explanation, Brown attributed the downgrade to uncertainty about two other subjects: how the Affordable Care Act will affect hospitals’ finances and what will happen with Kentucky’s Medicaid program. Because the state transferred this program’s management to private companies, hospitals and other providers have gotten stuck with waiting months for reimbursements.
Fitch Ratings classified Jennie Stuart’s outlook as “stable.” In short, it expects the hospital to reduce its operating costs to adjust to its decreased revenues.
“However, given its small revenue base and high debt burden, Fitch believes JSMC will need to maintain its current trajectory of better operating results coupled with stable liquidity, or further downward rating pressure could occur,” Fitch’s statement reads.
There are eight ratings above BBB. If Jennie Stuart’s rating were to slip two levels lower, to BB+, it would be on the level of “junk bonds,” no longer considered investment grade.
The statement cites several reasons for the downgrade.
The hospital has lost money two of the last four years, according to the statement. In 2010, it had an operating margin of 0.6 percent, and in 2009 a margin of 3.3 percent. But in 2008, the margin was negative 2 percent, and last year it was negative 1.9 percent.
In dollar amounts, the hospital’s revenue declined from $107 million in 2010 to $106 million last year. Its inpatient volume declined by 8.3 percent, and its total surgeries declined by 12 percent.
Brown said the hospital’s outpatient services have risen, but it often makes less money from those.
The hospital had $67 million in debt as of March 31 — an especially high amount for its revenue base, Fitch analysts said.
And finally, almost 14 percent of its gross revenue came from Medicaid and another 11 percent from out-of-pocket payments, which has resulted in a rising bad debt expense.
Its liquid assets have stayed stable, but mostly because of limited capital spending, according to the statement. As of March 31, it had unrestricted cash and investments totaling $39.6 million.
One of the factors buoying the hospital up is its lack of competition, analysts noted. For nearly 100 years, few providers have encroached on its market share, and it appears none will do so in the near future, analysts predicted.
Brown said the analysts were right to note reductions in operating costs.
About half the company’s costs are in labor, Brown said. But within the last two years, it has cut full-time equivalents by roughly 60 to 70, he said. Full-time equivalents could be either 40-hour-per-week positions or part-time slots that add up to 40 hours a week.
The company has also renegotiated some service contracts to save money and cut other contracts altogether, finding ways to perform those services in-house.
“We’re looking under every stone, because we want to impact our staff as minimally as we can,” Brown said.
As for the reduction in inpatient services, hospitals all over the U.S. have experienced the same trend, Brown said.
He hopes the new wound care program and the new primary care doctors it’s adding to its staff will bring revenues back up.
There are three major rating agencies in the U.S.: Fitch, Moody’s, and Standard & Poor’s. Moody’s has not rated Jennie Stuart in about 10 years, according to its records. Brown said Standard & Poor’s will conduct a rating later this year.

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