Moody’s Investors Service last week affirmed Allina Health Systems’ A1 rating and signaled an upgrade could be in the offing if it maintains its strong financial performance of the last two years.

Moody’s changed the system’s outlook to positive from stable. The action affects $668 million of outstanding debt.

The health care system issues its debt through the city of Minneapolis and the St. Paul Housing and Redevelopment Authority.

“Affirmation of the A1 ratings and the revision of the outlook to positive from stable reflect strong financial performance in fiscal 2009 and fiscal 2010, growth in unrestricted cash and investments, a relatively low debt burden, and an experienced and insightful management team,” analysts wrote.

Allina generated operating income of $203 million for a 6.6% margin in fiscal 2010. Unrestricted cash and investments increased to $1.2 billion from $1 billion a year earlier.

Allina is the largest system in the Twin Cities area with nearly $3.1 billion of annual revenue and a leading market share of 32% in its service area.

“These factors are offset by an intensely competitive market environment, sizeable off-balance-sheet liabilities in the form of operating leases, and management’s expectation that revenue growth will continue to remain low, all at a time in which uncompensated care is expected to rise,” according to Moody’s.

Allina operates 10 hospitals and competes with several other large systems, most of which have aligned themselves with physician groups to increase volume levels.

The three large health insurance plans in the region put stress on pricing levels and Allina’s uncompensated care has risen over the last two years, a trend that is expected to continue.

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