Mercy Health's large Ohio presence should help it past latest liquidity squeeze.

DALLAS — Mercy Health's pinched cash flow after the wind-down of its affiliated insurance company, and a slowdown in its collections process, drove a one-notch downgrade from Moody's Investor Service.

Moody's downgraded Mercy, Ohio's largest not-for-profit healthcare system, to A2 from A1. The system's short-term debt rating was lowered to A2/VMIG-1 from A1/VMIG-1, retaining the short-term portion of the rating. A further downgrade would strip the system of the top VMIG-1 short-term rating, Moody's said.

The action impacts $1.6 billion of debt and the outlook is negative.

The wind-down of Mercy's HealthSpan operation is expected to materially impair liquidity in 2016, Moody's said.

Mercy Health partnered with HealthSpan in 2013 as part of its push into the health insurance business. HealthSpan was acquired by Medical Mutual of Ohio in March. However Moody's said that the insurer's claims will be paid by Mercy throughout fiscal 2016 and early fiscal 2017.

Mercy is also liable for the risk adjustment payments HealthSpan is required to make under the Affordable Care Act in fiscal 2016. Accounting for HealthSpan as a discontinued operation, Mercy Health reported a 9.3% operating cash flow margin in fiscal 2015, compared with over 11% in fiscal 2014 excluding HealthSpan.

Mercy Health also faces an additional cash squeeze from collection issues related to the transition of its information technology platforms.

"The negative outlook reflects the risk that HealthSpan liabilities and IT [information technology] transitions result in a greater-than expected liquidity decline, given the magnitude and simultaneous timing of these multiple Initiatives," said Moody's.

On the positive side, Mercy Health retains its dominant position in Ohio. The system, which also operates facilities in Kentucky, recorded a 2.6% boost in patient admissions in fiscal year 2015. Outpatient surgeries grew 2% and the system continues to add physicians to its networks.

In Ohio, Mercy Health operates 23 acute care hospitals and 15 long-term care facilities.

The VMIG 1 short-term rating on the $100 million of Series 2012B bonds is based on Mercy Health's ability to provide liquidity for the purchase price of any un-remarketed bonds.

"Given an expected liquidity decline, Mercy is actively managing liquidity and has liquidated investments to maintain adequate daily liquidity for any un-remarketed tenders. Self-liquidity coverage has been relatively stable month-to-month in fiscal year 2016," Moody's said.

Both S&P Global Ratings and Fitch Ratings have AA-minus ratings and stable outlooks on the system.

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