CHICAGO — Wisconsin-based Meriter Hospital's steep losses at its affiliated for-profit health plan prompted Moody's Investors Service to downgrade its rating by one notch to A2 and the agency warned of further deterioration by assigning a negative outlook.

The hospital serves the Madison area and competes with University of Wisconsin Hospitals and Clinics and St. Mary's Hospital which is a member of SSM Health Care.

The action impacted about $97 million of rated debt sold through the Wisconsin Health and Educational Facilities Authority. Moody's had earlier this year put the rating on review. Meriter Hospital Services has another $133 million of debt not rated by Moody's.

"The downgrade and negative outlook reflect steep operating losses at MH's affiliate health plan, the Physicians Plus Insurance Corporation" known as PPIC, Moody's said.  The losses have hurt Meriter's cash flow margins.

The rating agency analysis considers the financial performance of MHS. The hospital itself represents about 83% of MHS assets and 56% of MHS total operating revenues. PPIC, a for-profit HMO product of which MHS is approximately 79% owner, accounts for the majority of the remaining MHS revenues.

The rating is supported by MHS's balance sheet ratios and a return to a stable outlook could be considered after PPIC demonstrates sustained and material improvement in bottom-line performance leading to an improved operating cash flow margin at MHS, Moody's said.

A downgrade could occur if PPIC continues to generate deep operating losses that weaken operating cash flow margins at MHS or if MHS's balance sheet ratios deteriorate materially or MH has a significant market share loss, Moody's added.

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