Fitch Ratings upgrades to 'A+' from 'A' the underlying rating to approximately $206 million Wisconsin Health and Educational Facilities Authority hospital revenue bonds (Gundersen Lutheran). The outstanding bonds are listed at the end of the press release. The Rating Outlook is Stable.
The rating upgrade to 'A+' reflects Gundersen Lutheran's (Gundersen) solid historical operating profitability, which has led to substantial liquidity growth, strong market position solidified by a well integrated delivery system strategy, and a loyal labor force. Gundersen has continued to generate solid profitability with operating margins of 3.0% in fiscal 2004, 5.0% through the nine months ended Sept. 30, 2005, and 3% has been budgeted for fiscal 2006. Strong profitability combined with improved revenue cycle management have led to solid cash flow generation. Days in accounts receivable have declined significantly to 52.5 days at Sept. 30, 2005 (compared with 104.2 days at Dec. 31, 2000), and Fitch believes the revenue cycle remains an opportunity for further financial improvement. As a result, unrestricted cash and investments have more than doubled to $279.3 million at Sept. 30, 2005 from $135.9 million at Dec. 31, 2002. This translated into 194.1 days cash on hand, a 17.4 times (x) cushion ratio, and cash to debt of 141.3% at Sept. 30, 2005. Gundersen's debt burden remains manageable, which has allowed it to generate a MADS coverage of 3.7x for the past two fiscal years and 4.9x through Sept. 30, 2005.
Operating performance has been supported by Gundersen's integrated delivery system, which includes 22 clinics, over 400 employed physicians, and the service area's largest provider-owned health plan, Gundersen Lutheran Health Plan (GLHP). Gundersen has been successful in leveraging its integrated delivery system strategy, which has allowed it to maintain a stable market share of 52% in the primary service area (accounts for 59% of admissions). However, Gundersen experienced a 6.3% decline in inpatient volume through the nine months ended Sept. 30, 2005 over the prior-year period due to a reclassification of admissions to observation stays. At the same time, outpatient volume has continued to show solid growth with the opening of a new outpatient surgery and cancer center in 2003. Gundersen is further supported by a loyal medical staff that has shown good growth and a nursing staff with very low vacancy and turnover rates, and no agency usage.
Credit concerns include the presence of a large competitor in the service area, flat enrollment growth and premium pressures at GLHP, and stagnant population growth. Although Gundersen maintains the leading market position in the service area, Mayo Health System has a significant presence in the market. Franciscan Skemp, Gundersen's main competitor, is affiliated with Mayo Health System, and highly specialized cases outmigrate to Rochester, MN, approximately 80 miles away. Market share data was unavailable for the four Mayo Health System hospitals located in the service area; however, Fitch believes their combined market share is considerable. Nonetheless, Gundersen has continued to leverage GLHP, which has allowed it to maintain a stable and leading market share in the service area. However, Fitch views the flat enrollment growth at GLHP over the past several years as a concern. Further, premium growth at GLHP over the medium term may be limited as reflective of nationwide trends. Located in La Crosse, WI, Gundersen's service area has exhibited relatively flat population growth, with the exception of a few areas. These faster growing areas include Onalaska, WI and Decorah, IA, where Gundersen is currently expanding its outpatient clinical presence.
The Stable Rating Outlook reflects Fitch's expectation that Gundersen will continue to capitalize on its integrated delivery strategy, allowing it to maintain a strong and stable market position. Furthermore, Gundersen's strong medical staff and strategic investments to its outpatient clinics in areas of faster growth should support future revenue growth. Fitch believes Gundersen will continue to generate solid profitability and cash flow generation. Gundersen's strong level of capital investments, which is expected to continue into fiscal 2006 and 2007, is viewed favorably given Fitch's expectation that liquidity indicators will be at least maintained. Although Gundersen expects to issue additional debt in the near term, Fitch believes the system has a moderate level of debt capacity. Final financing amounts have not been determined, and Fitch will evaluate the impact on Gundersen's rating at the time of issuance.
Gundersen is an integrated health care delivery system based in La Crosse, WI and consists of a 325 licensed bed (258 staffed bed) hospital, over 400-physician clinic, 34 branch clinics, and a health plan. Total revenue in fiscal 2004 was approximately $562 million. Gundersen covenants to provide annual and quarterly disclosure to bondholders for the obligated group only. Non-obligated group members include GLHP and approximately 20 small affiliates, which were factored into Fitch's analysis. Fitch expects minimal transfers to the health and other non-obligated affiliates. Quarterly disclosure includes a balance sheet and income and cash flow statements; however, Fitch views negatively that only audited financial statements are disseminated through the NRMSIRS.
