DALLAS – The Dallas County Hospital District lost its triple-A rating from Fitch Ratings Friday as construction of a $1 billion replacement for Parkland Hospital neared completion.
The downgrade to AA-plus affects more than $700 million of bonds issued in 2009 for the new hospital complex. All but $24.8 million of those were issued as Build America Bonds shortly after voter approval in 2008.
“The downgrade reflects Fitch's concerns regarding management and operational uncertainties stemming from a failed federal Center for Medicare and Medicaid Services survey in 2011,” wrote Fitch analyst Jose Acosta. “While Fitch believes the district is likely to pass a subsequent re-survey in 2013, the recent failure, along with the ensuing management turnover, are not consistent with Fitch's highest credit rating.”
Standard & Poor’s placed a negative outlook on its triple-A rating for the district on April 3, 2012, also citing the Medicaid survey.
The district's operating margins have been pressured by costs associated with its extensive Medicare and Medicaid compliance efforts coupled with modest revenue growth.
“Fitch notes that such costs will trend down after compliance is achieved but a new federal funding methodology will pose revenue pressures during the initial stages of implementation.”
The district's previously higher operating margins allowed it to fund a portion of the new campus, which is under construction across the street from the existing hospital near downtown Dallas, the Fitch report noted.
Property tax revenues make up a quarter of operating revenues, providing a stable revenue source with ample taxing margin below the maximum rate.
Like other large public safety net hospitals in Texas, Parkland's reliance on Medicaid funding is strained by major changes in funding formulas from Medicaid under the Affordable Care Act. Texas Gov. Rick Perry also rejected up to $100 billion of federal funds to expand Medicare in the state.
The district serves Dallas County's Medicaid and indigent care population, both of which have been growing. Parkland also serves as the region's leading obstetrics and trauma facility and has the only burn unit between Los Angeles and Miami.
In July 2011, the Center for Medicare and Medicaid Services assessed the district's conditions of participation survey to verify its qualification for Medicare and Medicaid reimbursements. The survey followed a patient complaint regarding emergency medical treatment.
In September 2011, CMS notified the district that it intended to terminate the district's participation in the Medicare and Medicaid program due to its failure to meet certain standards. Given the district's role as a regional healthcare provider, CMS suspended the termination, provided the district enter into a systems improvement agreement. If the district fails the second inspection, it can reapply for a renewal of the COP in 90 days.
In May 2012, the Parkland Health & Hospital System Board of Managers engaged an outside consultant to provide recommendations to improve the efficiency of Parkland's corporate governance system. Prepared by The Saranac Group LLC, the report contains 20 recommendations that are aimed at enhancing the capabilities of the board and improving the relationship between the board, hospital executives and elected officials.
“These recommendations, taken together, provide a comprehensive road map for the Board as we develop a sustainable governance model that is appropriate for a complex billion-dollar plus public safety net health system in the 21st century,” said Debbie Branson, Chair of Parkland’s Board of Managers.
While some of the recommendations, such as the reorganization of Board committees can be achieved through Board action alone, others, such as an expansion of the size of the board, will require legislative approval.
