DALLAS – With the threat of default rising, East Texas Medical Center Regional Healthcare System received a two-notch Moody's Investor Service downgrade to B3, with an outlook that remains negative.

The downgrade affects $280 million for one of the largest tax-supported healthcare systems in East Texas.

East Texas Medical Center Regional Healthcare System
The East Texas Medical Center settled a lawsuit with Blue Cross & Blue Shield in 2016, allowing ETMC patients to use the insurance. ETRMC

Moody's analyst Meredith Moore said that a default notice is expected on Feb. 28, 2018 unless ETMC sells assets. The default would be technical, caused by pledged revenues falling below the one-to-one debt service ratio. Once that happens, bondholders have the right to accelerate debt payments "without any grace or cure period afforded to ETMC," Moore said.

The Tyler-based system struggled to keep revenues flowing in a dispute with the insurance firms Blue Cross & Blue Shield, Aetna and Cigna over coverage at the East Texas Medical Center hospital. In 2015, ETMC sued Blue Cross, Aetna and Cigna health insurance for their refusal to cover patients at the system.

In the wake of the lawsuit Fitch Ratings dropped ETMC to BBB-minus, a rating that still stands with a negative outlook.

In August 2016, ETMC and Blue Cross and Aetna settled with ETMC.

Despite the resolution of the lawsuit, Moody's will maintain its negative outlook.

"ETMC continues to make its debt service payments on its all-fixed rate bonds in full and on time," Moore noted, adding that "if a payment default were to occur, recovery would be high with favorable security lien on the bonded debt."

A long-term challenge to ETMC is competition, primarily from Trinity Mother Frances Health System. While ETMC is the largest player in the market with 39.7% of the business, Trinity Mother Frances is close behind at 37.3%.

"While ETMC's decision to reduce its rural clinical footprint by four to eight communities will reduce its exposure to dilutive performance at those facilities, it may present future challenges in local referral patterns and any eventual move toward population health in the northeast/east Texas market," Fitch Analyst Stephen Friday said.

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