Moody's Investors Service said it has downgraded to MIG 3 from MIG 2 the rating on Madison County Hospital Health System, Fla.'s hospital facility project bond anticipation notes and places the rating under review for potential further downgrade.

The action follows the hospital's potential violation of the USDA's letter of conditions under the original USDA commitment letter related to the notes.

While both Madison County Hospital management and USDA oversight personnel report that construction of the replacement hospital is timely and on budget, the USDA has indicated the hospital potentially violated terms of its letter of conditions required to maintain the USDA's commitment to provide a direct loan to refund the notes upon substantial completion of the new hospital. Additionally, the hospital is involved in a legal dispute that could result in accelerated payment or repossession of its new health IT system.

The potential violation of conditions surrounds management's decisions to terminate its endoscopy service and to sell an indigent care clinic that provided a material source of revenues to the system. Management reports the endoscopy line was unprofitable and the indigent care clinic was sold to prevent further losses sustained during FY 2013 due to changes in Medicaid referral patterns.

However, USDA personnel report these changes could constitute a violation of terms of the letter of conditions. The letter of conditions requires written approval, which was not obtained by the hospital, from the USDA prior to changes in scope of services.

The hospital plans to fulfill the USDA's request for a revised feasibility study, which if approved, could satisfy USDA conditions. Additionally, management expects to sign a settlement agreement within the next several weeks related to payment for its IT system. The proposed settlement agreement would allow the hospital to postpone a large payment for the IT system until after substantial completion of the hospital.

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