Moody’s Investors Service revised the outlook of Health Alliance of Greater Cincinnati to negative from stable while affirming its A1 issuer rating, noting that the credit is facing challenges as two of its key hospitals move to separate from the system. 

After prolonged legal proceedings over the move by Christ Hospital and St. Luke’s Hospital from Health Alliance, the separation is likely to be complete within several months, Moody’s said.

The move could mean a short-term reduction in Health Alliance’s cash and cash flow, as well as a reduced market share and increased competition in the future, warned Moody’s analyst Lisa Martin in a report on the revised outlook.

“Despite these challenges, at this time, we believe a rating downgrade is too preliminary because the system continues to generate strong operating margins while addressing a number of operating issues, has a good liquidity position, and a very low debt level that gives the system flexibility to issue new debt,” Martin wrote. 

Health Alliance has a total of $367 million of outstanding debt, most of which is insured by MBIA Insurance Corp. and Financial Security Assurance.

The system currently enjoys a strong balance sheet and a 5% operating margin as well as a 38% market share of inpatient volume in the greater Cincinnati region. After the separation of the two hospitals, Health Alliance is expected to continue to hold 25% of the market — still a leading share. It has reported nine years of improving cash flow, a strong liquidity position with 232 days cash on hand, and a high 6.2 times peak debt service coverage in 2007.

The five-hospital system — excluding St. Luke’s and Christ — plans to take on a substantial but as-yet undetermined amount of debt as it moves forward with capital plans that it has currently tabled until the separation is complete.

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