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Fitch affirms KershawHealth’s BBB+ rating

Posted: July 27, 2012 5:20 p.m.
Updated: July 30, 2012 5:00 a.m.

Fitch Ratings, the international credit rating agency has affirmed its BBB+ rating for KershawHealth and deemed the healthcare system’s rating outlook as “stable.” George Corbin, a member of the KershawHealth Board of Trustees and chair of the board’s finance committee, gave his fellow trustees the good news at its July 23 meeting.

“We are struggling,” Corbin acknowledged, referring to a more than year-long revenue slump for the hospital, “but it’s a national struggle and this shows that we are stable and investment-grade.”

According to a Fitch press release, the company noted KershawHealth still has two series of bonds outstanding: $19.595 million in series 2008 S.C. Jobs - Economic Development Authority hospital facilities revenue bonds, and $1.45 million in series 2002 Kershaw County hospital facilities revenue bonds.

The key rating drivers behind Fitch’s BBB+ affirmation were a stabilized operating performance, leading market share, solid liquidity, declining debt burden and (financial) security in Fiscal Year 2011, which ended Sept. 30, 2011. Although KershawHealth has reported lower volumes during the 12 months, Fitch cited “favorable inpatient volume trends and cost control initiatives,” which it said has increased the healthcare system’s operating margin to 1.4 percent, a “significant improvement over the negative 1.4 operating margin” in Fiscal Year 2010.

Also of note is Fitch’s statement that KershawHealth has increased its inpatient market share to 54.6 percent. Fiscal Year 2012 to date (which ends Sept. 30), however, admissions are down 6.2 percent from where they were a year ago. June’s admissions stood at 369, a 101-patient drop from June 2011, accounting for a 21.5 percent downturn. Even in Fiscal Year 2011, Fitch noted in its report, that operating revenue growth had been negatively impacted by a 7 percent drop in Medicaid reimbursements and decreased outpatient elective surgeries. Both Medicaid reimbursements and elective surgery rates have continued to drop in the current fiscal year.

Fitch noted, however, that KershawHealth has controlled expenses as a way to mitigate those “negative factors.”

In addition to its dominant inpatient market share, Fitch also said KershawHealth is leading in “key clinical service areas” of cardiology, gastroenterology and general surgery.

“Kershaw is the only hospital in Kershaw County,” Fitch stated.

The company said KershawHealth’s debt burden should continue to fall since the hospital has not added debt in recent years. It also expects the hospital’s recently formed lab services partnership with Palmetto Health -- also rated BBB+ -- to be beneficial.

There are still concerns, however. Those, Fitch said, continue to be KershawHealth’s exposure to government (Medicare, Medicaid) payers and its small operating base.

“Kershaw’s size, with total operating revenues of $130 million in fiscal 2011 and 76 physicians on staff, makes Kershaw vulnerable to physician turnover and other changes in operations,” Fitch said. “Additionally, with 67.2 percent of gross revenue derived from Medicare and Medicaid in fiscal 2011, state and federal budget cuts could have a material impact on operating profitability.”

Overall, however, Fitch expects KershawHealth to “sustain current operating improvements, which coupled with its lightening debt burden, should further strengthen Kershaw’s overall credit profile.”

Going back to the June financials, KershawHealth’s chief operating and finance officer Mike Bunch reported that total surgical cases stood at 314 compared to 388 in June 2011. Earlier this month, KershawHealth made the decision to close one of its operating rooms due to a continued decline in surgical cases.

The month’s bottom line was hit hard, with operating income coming in at $273,341 compared to $813,537 in June 2011, a 66.4 percent drop. Fiscal year to date, KershawHealth has earned $856,317, compared to $2.76 million at this time in the 2011 fiscal year, a 28.5 percent difference.

KershawHealth President and CEO Donnie Weeks said he was pleased with Fitch’s affirmation, saying the entire staff has responded to the recent challenges.

“Everybody has been involved,” Weeks said. “We have made some bold moves in the past few years to protect our financial future. We are appreciative of those efforts.”

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