Fitch Ratings has affirmed the 'A+' rating on approximately $7.7 billion
of revenue bonds issued by or on behalf of Kaiser Permanente (Kaiser)
through the following conduit issuers:
--California Statewide Communities Development Authority;
--California Health Facilities Financing Authority;
--Maryland Health & Higher Educational Facilities Authority.
In addition, Fitch affirms the 'F1' short-term rating on approximately
$1.4 billion variable rate demand bonds, $1.6 billion of bonds in a
commercial paper (CP) mode, as well as the $1.5 billion Kaiser
Foundation Hospitals taxable CP program. The 'F1' short-term rating is
based on Kaiser's self-liquidity.
The Rating Outlook is Stable.
Debt service is an unsecured general obligation of the Credit Group
which is composed of the Kaiser Foundation Hospitals, Kaiser Foundation
Health Plan, Inc., Kaiser Hospital Asset Management and Kaiser Health
Plan Asset Management, Inc.
KEY RATING DRIVERS
UNIQUE BUSINESS MODEL: Kaiser's vertically integrated, closed health
maintenance organization (HMO) is unique among the health care and
health insurance and managed care companies rated by Fitch. Combined
with its exclusive contract with the Kaiser Permanente Medical Groups,
Fitch believes that Kaiser's fully integrated model allows the company a
higher level of control over its pricing and cost structure relative to
Fitch's other rated hospitals and health insurance companies.
LEADING MARKET POSITION, SIGNIFICANT SCALE: Based on premium revenues,
Kaiser maintains the largest market share in the large and important CA
health insurance and managed care market. Using other metrics such as
revenues, capital, and annual earnings as benchmarks, Kaiser is the
largest not-for-profit health care system in the country and is among
the largest health insurance and managed care organizations in Fitch's
STRONG FINANCIAL PROFILE: Certain of Kaiser's liquidity and capital
related ratios are among the strongest among all of Fitch's rated
not-for-profit hospital and health care systems. Further, historical
profitability has been steady with operating and operating EBITDA
margins at or above 3% and 6.7%, respectively, in each of the last three
SIZABLE PENSION LIABILITY: At Dec 31, 2013, Kaiser's pension liabilities
totaled $17.5 billion, which is improved from $18.6 billion at Dec. 31,
2012. Under the defined benefit pension plans the fair value of plan
assets at Dec 31, 2013 was $8.5 billion, which represents a weak 49% of
Kaiser's projected benefit obligation (PBO) and 65% of accumulated
benefit obligation (ABO).
CONCENTRATION IN CALIFORNIA: With 77% of revenues and 79% of membership
generated in CA, Kaiser's results are heavily influenced by changes in
the economic, political, regulatory and competitive environment in the
MULTIPLE RATING CRITERIA USED: Recognizing Kaiser's unique business
model, Fitch's ratings on Kaiser incorporate aspects from Fitch's
nonprofit hospital and U.S health insurance and managed care criteria.
The ratings place a heavier emphasis on the hospital criteria, since
Kaiser's hospital operations represent the majority of the
organization's earnings and assets.
MEMBERSHIP GROWTH AND IMPROVED FINANCIAL PROFILE: Fitch believes
Kaiser's vertically integrated, fully aligned HMO model is
well-positioned for the transition to a value-based health care
environment. Upward movement in the ratings could occur if there is
measured and profitable growth in membership in markets outside of CA;
further improvement in liquidity and leverage, and meaningful reductions
in the underfunded status of the organization's pension plans.
Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals are
not-for-profit corporations operating primarily as health maintenance
organizations. On a combined basis, Kaiser's total revenues in fiscal
2013 were approximately $53.1 billion.
UNIQUE BUSINESS MODEL
Fitch considers Kaiser Permanente a unique vertically integrated
health-care delivery network, composed of the Kaiser Foundation Health
Plan (KFHP), owned hospitals and outpatient facilities that are staffed
by physicians who contract exclusively with KFHP. In total Kaiser
operates 38 hospitals and 611 outpatient facilities staffed by 16,000
physicians (Permanente Medical Group physicians). The fully integrated
model provides a high degree of control in managing medical costs.
Because of its vertically integrated delivery model, Fitch believes
Kaiser will have continued success in a post-healthcare reform
LARGE SCALE IN CALIFORNIA
Fitch views the Kaiser Permanente business model as a key contributor to
KFHP's leading market share and strong competitive position in the large
CA health insurance market. While KFHP maintains large market shares in
CO, HI, and OR, and smaller, but geerally meaningful, market share in
seven other states, 78% of its 9.2 million members are located in CA.
Relative to its insurance peer group, Fitch views Kaiser Permanente's
higher single-state concentration as a negative factor because of the
company's corresponding significant exposure to the economic and
political environments in CA.
STRONG FINANCIAL PROFILE
In 2013, Kaiser generated operating income of $1.65 billion on total
revenues of $53.1 billion (operating and operating EBITDA margins of
3.1% and 6.8%, respectively) as compared to operating income of $1.57
billion on total revenues of $50.1 billion (operating and operating
EBITDA margins of 3.1% and 6.8%) in the prior year. The 5.9% growth in
revenues in 2013 reflects continued membership growth and improved
Relative to Fitch's hospital medians, Kaiser's liquidity and
capital-related indicators are among the strongest in Fitch's
not-for-profit healthcare universe. However, due to Kaiser's insurance
operations and attendant actuarial risks, a higher rating is precluded
at this time. Despite heavy capital spending above $3 billion annually
in each of the last three years (195% of depreciation expense), Kaiser
has been able to grow its unrestricted cash and investments position to
$29.2 billion at Dec. 31, 2013 from $21.9 billion at Dec. 31, 2011.
Kaiser's days cash on hand (DCOH) of 214.5, cushion ratio of 39.2x and
cash-to-debt of 412.9% exceed Fitch's nonprofit hospital 2013 'A'
category medians of 196.3 DCOH, 15.6x cushion ratio and 129.2%
Kaiser has been able to fund a high level of capital investment while
maintaining a strong balance sheet. Consistent cash flow generation has
allowed the company to fund its sizable capital plan which includes
seismic hospital replacements and upgrades, new hospital construction,
and investment in clinical information technology. Investment in
property plant and equipment (PP&E) has averaged $3.3 billion annually
over the last three years or almost 200% of annual depreciation.
Management reports that its CA facilities will be seismically compliant
under CA's SB 1661 in 2014. Annual capital spending is expected to be
lower going forward now that its seismic reinvestment is nearly complete.
Kaiser's debt and leverage metrics are light relative to Fitch's
hospital and health system rated entities. Because Kaiser utilizes
non-amortizing bullet maturities in its capital structure, the aggregate
debt service structure is not level. Maximum annual debt service (MADS)
of $744 million occurs in 2031 while average annual debt service (AADS)
is approximately $320 million. MADS equates to a very light 1.4% of
Kaiser's 2013 total revenues. Coverage of MADS by EBITDA was a very
solid 6.2x and 5.9x in 2013 and 2012, respectively which exceeds the 'A'
category median of 3.8x Coverage of AADS by EBITDA was a robust 14.5x
and 13.8x in 2013 and 2012, respectively.
SIZABLE PENSION LIABILITY
At FYE 2013, Kaiser's pension liabilities totaled $17.5 billion which is
improved from $18.63 billion at Dec. 31, 2012. Under the defined benefit
pension plans the fair value of plan assets at Dec. 31, 2013 was $8.5
billion, which represents a weak 49% of Kaiser's PBO and 65% of ABO. The
weak funding level reflects the low interest rate environment which
impacts discount rate assumptions used to calculate future benefit
obligations and pension expense. In 2013, Kaiser made pension
contributions totaling $985 million (compared to $1.5 billion in 2012)
while the plan paid $627 million in benefits. Additionally, the unfunded
status for post-retirement health care and life insurance benefits fell
to $5.5 billion from $7.3 billion in 2013 due to a change in plan
design. While Fitch acknowledges that pension and post-retirement
liabilities are a conditional liability that is highly sensitive to
changing regulatory, interest rate and actuarial assumptions, Kaiser's
pension obligations are significant and could depress the company's
liquidity and profitability in a sustained low interest rate environment.
Kaiser's short-term 'F1' rating is supported by the strong liquid
position of its investment portfolio. Upon the closing of the series
2012 issue, Kaiser will have approximately $3.1 billion of variable rate
and demand debt due within a year. At Dec. 31, 2011, Kaiser had more
than $5.8 billion of same-day settlement funds, which would cover
Kaiser's outstanding demand debt in excess of 1.25x as required under
Fitch's self-liquidity rating criteria. Kaiser's $1.5 billion taxable CP
program is supported by a $1.5 billion line of credit provided by a
consortium of banks.
Kaiser covenants to provide audited financial statements to bondholders
within six months of the close of each fiscal year, as well as quarterly
unaudited financial statements no later than 60 days after each quarter.
Disclosure to Fitch to date has been excellent and includes quarterly
earnings calls and subsequent distribution of detailed financial
statements. Kaiser also provides a quarterly earnings press release
detailing the quarterly performance.
Fitch currently has an IFS rating of 'A+' on the following:
--Kaiser Foundation Health Plan, Inc.;
--Kaiser Foundation Health Plan of the Northwest;
--Kaiser Foundation Health Plan of Georgia, Inc.;
--Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.;
--Kaiser Foundation Health Plan of Colorado;
--Kaiser Permanente Insurance Company.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'Insurance Rating Methodology' (Nov 13, 2013);
--'Nonprofit Hospital and Health System Rating Criteria' (May 20, 2013);
--''Health and Managed Care (U.S.) Sector Credit Factors Special Report'
(Dec. 18, 2013);
--'Rating U.S. Public Finance Short Term Debt, (Dec. 9, 2013)
Rating U.S. Public Finance Short-Term Debt
Health Insurance and Managed Care (U.S.)
2002 Nonprofit Hospital and Health Care Systems Outlook
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