Moody's Investors Service said it has downgraded Meriter Hospital's long-term rating to A2 from A1, removing the rating from review.

This action affects approximately $97 million of rated revenue bonds issued through the Wisconsin Health and Educational Facilities Authority.

The rating outlook is negative. In addition to MH's rated debt, the Meriter Health Services system has approximately $133 million of debt that does not carry an underlying rating by Moody's, including approximately $35 million of Series 2008C variable rate demand obligation bonds and $25 million of Series 2002 VRDO bonds, which are supported by irrevocable direct pay letters of credit from U.S. Bank and JPMorgan Chase Bank, respectively.

The downgrade and negative outlook reflect steep operating losses at MH's affiliate health plan, the Physicians Plus Insurance Corporation.

Moody's analysis considers the financial performance of MHS. MH represents approximately 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 downgrade and negative rating outlook reflect PPIC's deep operating challenges that have resulted in very modest operating cash flow margin at MHS.

The A2 rating is supported by MHS's balance sheet ratios (which remain adequate at the A2 rating level) and Meriter Hospital (exclusive of PPIC) continues to generate good operating margins even though Meriter has increased significantly in recent years the number of physicians it employs.

A move to the stable outlook may be considered after PPIC demonstrates sustained and material improvement in bottom-line performance leading to an improved operating cash flow margin at MHS.

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