Fitch Ratings has affirmed the 'A' rating on approximately $1.1 billion
in revenue bonds issued by Maryland Health and Higher Educational
Facilities Authority and District of Columbia on behalf of MedStar
The Rating Outlook is Stable.
The bonds are secured by pledges of gross revenues of the system
hospitals and by mortgages on the system hospitals and parking
KEY RATING DRIVERS
SIGNIFICANT MARKET PRESENCE: The system has a strong market presence in
the Baltimore - Washington D.C. corridor, which includes a large
ambulatory network, a significant and increasing level of physician
alignment and a reputation for clinical excellence, garnering MedStar a
stable 21.6% market share.
CONSISTENT PROFITABILITY: MedStar's operating metrics have historically
been lower than the 'A' category medians, but the system has maintained
a consistent level of profitability, with operating margins of around 2%
and operating EBITDA margins of 7%, generating a robust cash flow from
operations averaging $241 million annually over the last four fiscal
years. The system should also benefit from several of its hospitals
participating in Maryland's Global Budget Revenue (GBR) Program, which
provides a predictable revenue stream.
MODEST LIQUIDITY METRICS: At March 31, 2014, Medstar's $1.4 billion of
unrestricted cash and investments equated to 120.5 days cash on hand
(DCOH) and 125.7% of cash to debt, lighter than the category medians.
However, liquidity growth has been limited by the substantial investment
in system growth, which has largely been funded from operating cash flow.
MANAGEABLE DEBT LOAD: The system's coverage of maximum annual debt
service (MADS) at 4.1x at fiscal year-end (FYE) 2013 (June 30) and 5x
through the third quarter of 2014 (3Q'14)was better than the 'A'
category median of 3.8x, MADS is a light 1.7% of revenues, and the
system has a conservative debt structure with close to 90% of its
long-term debt in fixed-rate mode.
WELL-POSITIONED FOR HEALTH CARE REFORM: MedStar's geographic coverage of
its market, its robust and growing ambulatory network and 3,400 active
physicians, and close alignment with 1,400 employed and 1,000 contracted
physicians provide a solid base for participating in population-based
health management programs.
STABLE PROFITABILITY EXPECTED: The Stable Outlook and maintenance of the
'A' rating depends on MedStar's ability to maintain profitability at the
current level in order to generate sufficient cash flow from operations
to support the planned ongoing investments in system facilities and
MedStar is a large, integrated health care system composed of 10
hospitals (nine acute care and one rehabilitation hospital) with a total
of 3,398 licensed beds and several other health care-related
organizations. MedStar had total operating revenues of $4.2 billion FYE
Significant Market Presence
MedStar maintains a leading 21.6% market share (2013 data) of its
primary service area, which encompasses the cities of Baltimore and
Washington D.C. and the 11 surrounding Maryland counties. The system has
the leading market position in several high-end specialty areas
including cancer (21%), cardiac services (28.9%), neurology (21.7%), and
orthopedics (22.9%), services for which it competes with University of
Maryland Medical System (rated 'A' by Fitch) and Johns Hopkins Health
System (rated 'AA-'). Its market share is supported by a large employed
physician component with 1,400 physician full-time employees (FTEs), as
well as a comprehensive and still growing ambulatory network which
includes a number of urgent care centers, ambulatory surgery centers and
freestanding oncology site. The ambulatory footprint will be further
bolstered by a planned addition of eight multispecialty centers, part of
MedStar's continuous investment in the sytem's distributive care
MedStar has generated a modest but steady level of profitability over
the last four years, with operating margin averaging 2% and operating
EBITDA margin averaging 7%. In fiscal 2013 MedStar reported operating
income of $73.9 million, equal to a 1.8% operating margin and 6.8%
operating EBITDA margin, lower than Fitch 'A' category medians of 3.3%
and 10.7%, respectively. Through the nine months ended March 31, 2014,
MedStar's income from operation was reported at $75.6 million, ahead of
the budgeted $53.7 million, for operating margin of 2.2% and operating
EBITDA margin of 7.2%, and the system is projected to end the 2014
fiscal year with operating income of $100 million. Management credits
the solid year-to-date results to expense control, focus on bad debt
management and favorable rates, partially arising from five of their
hospitals under Maryland's GBR program starting with January 2014, which
accounts for approximately one third of the system's total revenues.
Under GBR, which is designed to align incentives with a population-based
health care delivery model, the participating providers are paid a
predetermined level of revenues regardless of volumes based on their
market position and demographic profile of the populations they serve.
MedStar's operating metrics have historically been lower than Fitch's
'A' category medians, partially due to the system focus on physician
recruitment and expansion of the ambulatory network, and the
reimbursement constraints imposed by the Maryland all-payor system.
Management is projecting to maintain a 1.9% operating margin through the
2015-2018 period, while continuing to fund a portion of their capital
needs from operating cash flow.
Manageable Debt Load
MedStar's debt burden remains light with coverage of MADS by EBITDA of
4.1x in 2013 and 5x through 3Q'14, better than the 'A' category median
of 3.8x. MADS as a percent of revenues at 1.7% is significantly lower
than the 3.1% category median. Management has planned additional debt
issuance in 2015 and 2016 totaling approximately $275 million to fund
portions of their capital investment plan. Fitch considers the rating
stable even when assuming the potential additional debt issuance,
provided profitability is maintained at the projected level.
MedStar has a $250 million line of credit, with $129.8 million drawn as
of March 31, 2014 (deducted from available unrestricted cash for
purposes of Fitch liquidity metrics calculation). The three letters of
credit backing the series 1998A, B and C bonds have May 2015 and March
and May 2017 expiration dates with repayment terms over five years. The
mark-to-market of its one swap with notional par of $103.4 million was a
negative $14.4 million at March 31, 2014.
Fitch views MedStar's liquidity to be modest relative to the 'A'
category medians. The lower liquidity levels, however, need to be seen
in the context of the investment in system growth that was accomplished
to a large degree from internally generated cash flow. MedStar's debt
increased by only approximately $232 million over the last four years,
which included the acquisition of Southern Maryland Hospital Center in
2012, funded with $180 million of debt. Unrestricted cash and
investments of $1.4 billion at March 31, 2014 translate to 120.5 DCOH,
17.8x cushion ratio and 125.7% cash-to-debt, with DCOH lower than the
respective 'A' category median of 196 days, but cushion ratio and
cash-to-debt are consistent with the medians of 15.6x and 129.2%,
respectively. MedStar's lower liquidity metrics are partially mitigated
by a modest debt load, the system's considerable geographic
diversification, and advanced level of system integration. Fitch does
not anticipate liquidity to increase significantly over the next several
years based on the capital needs of the system.
MedStar covenants to provide annual disclosure to bondholders within six
months of year-end and quarterly disclosure within 75 days of
quarter-end. Quarterly disclosure is very good and includes a balance
sheet, income statement, cash flow statement, utilization, and
management discussion and analysis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 16, 2014
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30,
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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