Fitch Ratings said it has downgraded the $107.5 million Pennsylvania Economic Development Financing Authority health system revenue bonds, series 2009A, issued on behalf of Einstein Healthcare Network (EHN) to BBB from BBB-plus.
The rating outlook is stable.
Additionally, Einstein Medical Center Montgomery (EMCM), an affiliate of EHN, has approximately $303 million of Federal Housing Administration (FHA) insured mortgage revenue bonds, series 2010 outstanding. The FHA bonds are non-recourse to the EHN obligated group and are not rated by Fitch. In total, the consolidated system had outstanding debt of approximately $430 million as of Dec. 31, 2014.
Continued losses remain greater than budgeted targets. In fiscal 2014 (June 30; audited) EHN recorded an operating loss of approximately $20.8 million (negative 1.9% operating margin and positive 5.7% operating EBITDA margin), which was significantly below management's expectation of near breakeven performance by year-end.
The significant negative variance in financial results, which has occurred for the second consecutive year, partially reflects continued start-up expenses related to the opening of EMCM, below-budgeted levels of productivity in conjunction with the rollout of EHN's electronic health record, further declines in utilization coupled with increased observation stays, and large one-time professional liability expenses.
Overall, Fitch views EHN's profitability indicators as weak when compared against Fitch's BBB category medians and as a primary contributor to the rating downgrade.
Through the Dec. 31, 2014 (unaudited) six-month interim period, EHN recorded an operating loss of approximately $10.7 million (negative 1.9% operating margin), which was slightly more than the original budgeted loss of $8.3 million.
The operating loss is primarily driven by several factors that include continued declines in inpatient utilization along with increased observation stays, severance expenses related to a reduction in force (175 positions), and higher than expected drug and medical device expenses. Management's original fiscal 2015 budget was to incur an operating loss of approximately $3 million, but that has now been revised to a slightly larger loss of $4-$5 million by year-end.
