September 20, 2013

Maine hospital sees credit-rating dip as lesson

MaineGeneral Health expects little impact from the downgrade, but will try to increase profitability.

KEITH EDWARDS Kennebec Journal

AUGUSTA – MaineGeneral Health officials say a downgraded credit rating will have no immediate impact, but it reaffirms the need for the health care provider to return to profitability.

click image to enlarge

This photo taken on Aug. 14, 2013 shows the new Alfond Center for Health regional hospital in north Augusta. Moody's Investors Service has downgraded MaineGeneral's credit rating just ahead of the new $300 million-plus hospital's November opening, citing the hospital's weaker financial performance over the last fiscal year.

Staff photo by Joe Phelan

Moody's Investors Service has downgraded MaineGeneral's credit rating just ahead of the new $300 million-plus hospital's November opening, citing the hospital's weaker financial performance over the last fiscal year.

The agency cited low revenue growth because of Medicare and Medicaid cuts, rising bad debt and charity care, and lower inpatient volumes as the reason for the downgrade.

Michael Koziol, chief financial officer for the nonprofit organization, which runs hospitals in Augusta and Waterville, said the change in credit rating should not have any immediate impact on the system because it has no plans to borrow additional money any time soon.

But he acknowledged that the operating losses projected for this fiscal year noted in Moody's report are accurate and indicate a need to boost revenue and limit expenses.

"We have to get back to profitability, that is our goal," Koziol said. "That's a challenge we face every year -- maintaining profitability while coping with the uncertainty of the health care industry. We're up for the challenge."

Moody's changed the rating for $281 million in bonds that MaineGeneral issued in 2011 to build its the new hospital in north Augusta to Ba1, the highest in a tier of ratings applied to bonds which are "considered speculative and are subject to substantial credit risk."

The previous rating was Baa3, considered, according to Moody's, to be medium-grade and subject to only moderate credit risk.

Koziol said MaineGeneral officials are disappointed at the credit rating downgrade because when the bonds were issued the main concern of credit raters then was the construction risk associated with building a new hospital.

He said the hospital construction came in ahead of time and on budget, so officials hoped the bond rating wouldn't change.

Charles Colgan, an economist at the Muskie School of Public Service at the University of Southern Maine, said in general a downgraded bond rating means higher interest rates on borrowing.

That could mean little or no impact on MaineGeneral if it doesn't plan on any major borrowing.

"When you get a downgrade, any additional money they borrow would probably come at higher interest rates, but it doesn't have any other practical consequences," Colgan said Friday. "And if they have no plans to borrow a lot of money, it may have no impact at all."

Moody's also downgraded MaineGeneral's outlook for the immediate future from stable to negative, noting this coming year the organization will have additional costs as it moves into the new hospital.

In the 2014 fiscal year, Moody's said the hospital is expecting a $17.3 million operating loss and operating cash flow of $24.2 million.

Koziol said while there will be one-time expenses in moving to the new hospital, being at the site will improve finances over time because it will operate more efficiently.

The hospital also has heavy debt, according to Moody's, and the aging population of central Maine will increase the hospital's exposure to Medicare.

But overall, Moody's noted the new hospital's early completion as a strength. The organization also just received $48 million in Medicaid back payments from the state.

 

Keith Edwards can be contacted at 621-5647, or at

kedwards@centralmaine.com

 

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