Search:

Amend: Fitch Affirms Union Hospital (Affinity Health Alliance), Maryland Hosp Revs at 'A'

(This is an amended version of a press release originally issued on Oct. 24 and contains additional information provided by Affinity as it relates to the second paragraph, as well as additional information on its disclosure practices in the last paragraph.)

Fitch Ratings has affirmed the 'A' rating on the approximately $78 million of outstanding hospital revenue bonds issued on behalf of Union Hospital of Cecil County, Maryland. The outstanding bonds are listed at the end of the press release. Fitch's analysis is based on the consolidated financial statements of Affinity Health Alliance (Affinity), the sole corporate member of Union Hospital. The Rating Outlook is Stable.

In fiscal 2006, after five years of solid operating profitability, Affinity posted a negative 0.7% operating margin in fiscal 2006. Starting in 2005, Affinity experienced problems with its billing and collection functions associated with an outside consultant being engaged to run the hospital's revenue cycle processes. Affinity subsequently replaced the consultant and restructured its billing and collection function, including the creation of a new director of patient accounting at the hospital. As a result, Affinity recognized a greater than average increase in contractual discounts (approximately $3 million impact) and a larger percentage of deductions to gross revenues for fiscal 2006. A new chief financial officer (CFO) was also hired in January 2006 to fill a vacant position.

Additionally, patient volume has been below Fitch's expectations and below Affinity's initial projections, as discharges declined 4.6% and 4.4% in fiscal 2005 and 2006, respectively. Through the three months ended Sept. 30, 2006, discharges appear to have stabilized. The decline in patient volume was due to disruptions caused by construction at the hospital, physician departures in several key service lines, and below average patient usage rates in Cecil County. Construction of the 48 bed inpatient tower (Phase I) and parking garage are approximately three months delayed due to unexpected construction obstacles, but still remains on budget. Management expects both projects to be completed by the end of Jan. 2007. The new CFO has also recently developed a floating labor pool to flex staff and better match fluctuations in patient volume levels.

Recent initiatives raised Affinity's operating margin to 2.4% through the three months ended Sept. 30, 2006. While recent operating profitability remains below historic levels, EBITDA margin remains strong at 15.6% in fiscal 2006. Affinity expects to receive close to a 6% rate increase from the Maryland Health Services Cost Review Commission in fiscal 2007. Management has budgeted an aggressive 4.3% operating margin for fiscal 2007.

The Stable Outlook reflects Fitch's belief that initiatives related to revenue cycle management, labor staff productivity, and medical staff development will result in operating margins closer to 3%-4% over the near term. Inpatient volume should also improve with the expected completion of the patient tower in Jan. 2007 and renovations to existing inpatient units in the second half of 2007. Failure to achieve these goals, leading to declines in debt service coverage or liquidity ratios, could result in rating pressure.

Credit strengths that continue to support the 'A' rating include Affinity's dominant market position, strong liquidity, solid operating profitability and cash flow in prior years, and good service area characteristics. Although declining slightly in recent years, Affinity maintained a very strong 71.1% market share for 2006 in Cecil County, Maryland (73% in 2004; market share is for discharges from Maryland hospitals only). Liquidity remains strong with 336 days cash on hand, 15.9 times (x) cushion, and 108% cash to debt at Sept. 30, 2006, albeit at lower levels than in fiscal 2006. While profitability has recently declined, Affinity has historically generated solid operating profitability and cash flow. The service area characteristics remain positive, the strongest of which is the region's rapidly growing population.

Affinity's high debt burden continues to be a credit risk, with MADS at 5.5% in fiscal 2006. Also, Affinity's small size exacerbates the challenge of recruitment and retention. The top ten admitting physicians composed a high 47% of Affinity's total admissions in fiscal 2004 and nurse turnover rates remain high.

Located in Elkton, Maryland, Affinity consists of Union Hospital, a general acute care hospital with 122 staffed beds, and other entities. In fiscal 2006, Affinity reported total revenues of $94 million. Affinity covenants to provide annual audited financials and quarterly disclosure to the nationally recognized municipal securities information repositories. Quarterly disclosure is currently limited to only include a balance sheet and income statement, which is viewed negatively by Fitch. Quarterly disclosure lacks management discussion and analysis, a cash flow statement, utilization statistics, and a comparison to the budget and prior year period. Affinity and Union Hospital are currently evaluating the enhancement of its quarterly disclosure practices going forward.

Fitch rates the following outstanding bonds at 'A':

--$33,675,000 Maryland Health and Higher Educational Facilities Authority revenue bonds (Union Hospital of Cecil County Issue), series 2005;

--$22,905,000 Maryland Health and Higher Educational Facilities Authority revenue bonds (Union Hospital of Cecil County Issue), series 2002;

--$4,222,000 Town of Elkton, Maryland Economic Development revenue bonds (Union Hospital Facility), series 2000;

--$15,685,000 Maryland Health and Higher Educational Facilities Authority revenue bonds (Union Hospital of Cecil County Issue), series 1998;

--$1,640,000 Maryland Health and Higher Educational Facilities Authority revenue bonds (Union Hospital of Cecil County Issue), series 1992.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.