CHICAGO - Two ratings agencies have revised their outlooks on Mercy Medical Center, Iowa's A level ratings to negative due to the hospital's operating struggles.
Moody's Investors Service affirmed the hospital's A2 rating and revised the outlook to negative from stable Jan. 6. The action impacts $118 million of rated debt.
Standard & Poor's in late December revised its outlook while affirming the hospital's A-plus rating. The hospital's debt was issued through the Iowa Finance Authority and Cedar Rapids.
Mercy Medical Center is a 314-staffed-bed acute care hospital in Cedar Rapids and is a founding member of the University of Iowa health Alliance. The medical center is part of MercyCare Service Corp.
The rating reflects the system's "maintenance of strong balance sheet ratios, location in a quality service area, and track record of good operating results prior to fiscal 2013," Moody's wrote. The negative outlook stems from the system's "significant deterioration in operating margins in fiscal 2013, with challenges continuing into interim fiscal 2014."
In addition to its operating losses, the system is also challenged by local competition from other systems and susceptibility to future Medicare cuts as revenues from the federal program account for 50% of gross revenues.
Standard & Poor's analyst Suzie Desai said the agency's action "reflects MMC's sizable operating losses in fiscal 2013 and through the first four months of fiscal 2014, which has led to thin cash flows and lighter maximum annual debt service coverage that are not consistent with the rating."
With a turnaround plan in place, management expects coverage will improve back to over four times, but operating losses could continue through 2014, albeit at a lower rate than 2013, she wrote. While management has identified specific opportunities with regards to the turnaround plan, industry pressures related to flattening revenues and declining volumes could be a continued challenge, she added.
A downgrade will be considered if MSC fails to show noticeably improved operating margins in FY 2014 and beyond," according to Moody's. "Material market share loss and/or significant balance sheet weakening also could lead to a downgrade."
