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Fitch ups KH outlook, but lowers rating

Posted: July 31, 2014 5:04 p.m.
Updated: August 1, 2014 5:00 a.m.

Fitch Ratings upgraded its financial outlook for KershawHealth from “negative” to “stable” July 17, according to press releases issued by the ratings firm and KershawHealth on Tuesday. KershawHealth said Fitch upgraded the outlook as a reflection of the healthcare organization starting to implement its strategic plan.

However, Fitch also downgraded KershawHealth’s bond rating from BBB+ to BBB, “reflecting the financial challenges that have been reported publicly,” KershawHealth said in its release.

In its own press release, Fitch listed a mix of key ratings drivers -- some negative, some positive -- including weakened operating performance, declining debt burden, solid liquidity and leading market share. It also stated that Fitch expects KershawHealth’s “operating profitability to continue the improvement trend that began” in Fiscal Year 2014’s second quarter. That trend, along with the declining debt burden, should help KershawHealth’s ability to cover its maximum annual debt service (MADS).

However, Fitch warned that “failure to continue operating improvement and to improve MADS coverage will result in further negative rating pressure.”

In its statement concerning what it terms KershawHealth’s weakened operating performance, Fitch cited an operating margin decreasing to -4.7 percent in Fiscal Year 2013 and -5.2 percent during a six-month interim period that ended March 31. Fitch further noted that the operating margin stood at -2.7 in Fiscal Year 2012. It did state, however, that 98.6 of the six-month interim loss occurred in the first quarter of the fiscal year and that operations now appear to be improving.

Fitch stated that KershawHealth’s decline in profitability is “primarily due to decreased inpatient admissions and inpatient surgeries, a previous 7 percent cut to South Carolina Medicaid reimbursement, decreased supplemental government funding, increased bad-debt and increased self-pay” patients.

While Fitch also stated that KershawHealth administrators had “effectively managed costs, with total operating expenses decreased .2 percent in fiscal (year) 2013 and increasing a modest .2 percent in the interim period … the effective cost management was unable to mitigate the decrease in revenues.

Both KershawHealth and Fitch noted the impact of the decision by Gov. Nikki Haley’s administration not to expand Medicaid in South Carolina.

“South Carolina’s decision not to expand Medicaid adds an additional financial burden for hospitals in the state,” KershawHealth officials said. “In fact, a new report from Fitch predicts non-profit hospitals in states that have chosen not to expand Medicaid will experience increasing financial challenges in 2014, and in years to come, while hospitals in states that have expanded Medicaid have already begun to realize the benefits of increased insurance coverage.”

In its release, Fitch stated that KershawHealth’s Fiscal Year 2014 operating performance “has been negatively impacted by South Carolina’s decision not to expand Medicaid … which would have alleviated some of KershawHealth’s bad debt and would have helped to offset the decreases in supplemental government funding.”

On the positive side, Fitch noted KershawHealth’s 49 percent market share, being the only hospital in its primary service area. However, it said that market share has been eroded by decreasing inpatient volumes, emergency department operational issues and increasing competition from Columbia hospitals. Fitch cited KershawHealth’s new public relations campaign (“You Are Vital”), recruitment of key physicians and its partnership with TeamHealth for emergency department operations as positive signs.

In its press release, KershawHealth cited its strategic plan and its partnerships with TeamHealth and Orthopaedic Advantage as positive steps to help improve its bond rating going forward.

“While the (strategic) plan details immediate steps necessary to address KershawHealth’s shorter-term financial challenges, it focuses on future development of existing assets to strengthen and broaden the level of care provided to Kershaw County and surrounding communities,” KershawHealth officials said.

They also said the plan “further provides for pursuing opportunities that might include leveraging local ownership of KershawHealth to maximize its strategic value” and that it is “creating a culture and organizational structure that foster innovation and embraces change … as critical to the organization’s future success.”

Administrators also noted that the Orthopaedic Advantage partnership’s goal is to develop a Joint Replacement Center. In concert with Ponder & Company, KershawHealth has also begun planning for a future ambulatory surgery center and performance health center at its Elgin campus.

 

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