DALLAS — Banner Health, one of the largest nonprofit hospital operators in the nation, is issuing $252 million of taxable and tax-exempt revenue bonds this week, with the proceeds covering expansion of a Phoenix hospital, along with refunding of commercial paper and long-term debt.
The bonds will be issued through the conduit Arizona Health Facilities Authority and will be priced Wednesday and Thursday through negotiation with Bank of America Merrill Lynch and Morgan Stanley.
Standard & Poor’s and Fitch Ratings maintain stable outlooks on their AA-minus ratings of Banner Health. Moody’s Investors Service does not rate the health care credit.
“The ratings reflect our view of the system’s sound enterprise profile as a system with a strong multi-state presence, continued solid financial performance, a seasoned management team, and its preparations for health care reform,” wrote Standard & Poor’s credit analyst Geraldine Poon.
“While Banner has had, and is expected to have, a strong appetite for both capital and debt, the system has a history of rebuilding its balance sheet,” the analyst wrote.
Proceeds from the tax-exempt Series 2012A bonds will fund $158 million for construction of a new six-story tower at Banner Estrella hospital in west Phoenix and $18 million to build out so-called shelled space at Banner Baywood in the East Valley suburb of Mesa.
About $10 million will go toward reimbursement for previous capital expenditures.
Proceeds from the taxable Series 2012B will refund $69 million of the Series 2008D bonds.
Security for the bonds consists of a gross revenue pledge from the Banner Health obligated group under the master trust indenture.
“As Banner has built out its network in the Phoenix metropolitan area, the system further extended its market-share position of inpatient admissions to 44.8% in 2011 from 42.3% in 2009,” wrote Fitch analyst Jim LeBuhn. “Banner was the only health care provider to increase its market share position over that time frame.”
Construction at Banner Estrella will expand the hospital’s emergency room, neonatal intensive care unit and operating rooms.
Last year, the hospital treated nearly 100,000 patients in its E.R.
The new 175-bed patient tower is the second on the Banner Estrella campus, with completion is expected in July 2015.
Banner Health operates in seven states, with more than $5 billion in revenues in 2011.
In Arizona, Banner Health is the state’s second-largest private employer behind WalMart, according to census data. The state government is the largest employer of any type.
When the housing market collapsed in 2008, Arizona suffered more than most states because it relied on related industries such as home construction, landscaping, home-improvement, and real estate services.
According to a University of Arizona report issued last week, the state’s growth-related industries accounted for a little more than 300,000 jobs in 2011, down almost 200,000 from peak employment of 2006.
Despite the severe decline in the economy, Banner Health managed to weather the recession in decent shape, according to analysts.
“Banner has been able to generate strong and consistent operating results that exceed Fitch’s AA category medians,” LeBuhn noted. “From 2009 to 2011, Banner has generated operating margins between 4.8% and 6.9%.”
According to Moody’s, the single largest risk to the nonprofit health care industry is low revenue growth.
“The economic recovery will remain tepid, the transition to new payment methodologies will require significant investment, reimbursement will remain under pressure from all sources, and revenue growth will remain low by historical standards,” Moody’s analyst Daniel Steingart wrote in a mid-year report on the nonprofit health care industry issued Aug. 15.
The uncertainties of national health-care reform pose more questions.
“On average, Medicare and Medicaid insure over 50% of a hospital’s patients and we expect reductions in revenue growth from both sources in the coming years,” Steingart wrote.
“Federal health care reform mandates a slowdown in the growth rate of Medicare reimbursement, and although the annual market basket update is likely to remain positive in nominal terms, we believe there is a strong likelihood that the real inflation-adjusted rate of reimbursement will decline,” he added.
In Arizona, the GOP-controlled Legislature and Republican Gov. Jan Brewer reduced reimbursements for doctors and hospitals by 5% in July 2011 and another 5% in October.
To adjust to new standards of efficiency under federal law, nonprofit hospitals are investing in technology that will improve recordkeeping, Moody’s said.
Banner last month reported that 21 of its medical facilities have achieved the final stage in the adoption of electronic medical records, according to the Healthcare Information and Management Systems Society.
“As Banner invests heavily in its physician alignment strategies, IT platforms, and partnerships with commercial payors, Banner is fast becoming a clinically and vertically integrated organization focused on care coordination and population health management,” Fitch’s LeBuhn said.
“The upcoming federal election is another potential hindrance to long-term planning as a change in Congress or the White House could result in major changes, or a repeal of health care reform,” Steingart added.
Republican presidential candidate Mitt Romney has vowed to overturn the Affordable Care Act, while his running mate Paul Ryan has proposed dramatic changes in Medicare.
As a state that attracts a large number of retirees, Arizona could be affected by any Medicare changes.