CHICAGO - Chicago-based Resurrection Health Care's "sizeable" losses, which have eroded the Catholic system's liquidity and debt service coverage ratios, prompted Standard & Poor's yesterday to revise its outlook on the underlying BBB-plus credit to negative from stable.

The system's operating losses resulted in negative 5.2% margins in both fiscal 2008 and fiscal 2009 and a weakened debt service coverage ratio that was down to 1.3 times in fiscal 2009 from 2.4 times a year earlier. The action affects nearly $600 million of debt.

Unrestricted liquidity dwindled to 115 days cash on hand at the end of March from 130 days at the close of last June and 172 days a year earlier. The decline is due to investment losses, operating struggles, and capital spending. Analysts also said they remain concerned over the system's floating-rate exposure with 57% of Resurrection's portfolio in a variable-rate structure.

"While Resurrection continues to maintain a leading market position in many of its markets, and while specific cost savings initiatives should support the credit, some meaningful and sustained improvement in financial operations is required to return the outlook to stable," warned analyst Suzie Desai. "Continued losses at the current level, however, are likely to result in a downgrade."

Analysts said they view positively the system's hiring of new chief executive officer and president Sandra Bruce last November.

Bruce, who previously was CEO of Saint Alphonsus Regional Medical Center in Boise, Idaho, "has brought a renewed focus on improving financial performance, as well as overall governance and accountability," analysts wrote.

The hospital launched a new operating action plan aimed at improving profitability and has outlined specific cost savings and revenue cycle initiatives that are expected to save $43 million annually - moves already positively affecting fiscal 2010 numbers. Additional cost savings of between $23.5 million and $58.0 million have also been identified.

Despite drops in patient volumes, the system's market position remains solid at 31% in its primary service in the Chicago area. The negative outlook is the latest in a series of credit hits. Standard & Poor's last year knocked the credit down to its current rating level from A-minus and Fitch Ratings downgradedit to A-minus. Moody's Investors Service has maintained its A3 but assigns a negative outlook.

Charity care and bad debt costs, and the number of Medicaid payors in its patient base are also taking a toll on the system's finances. Not-for-profit hospitals face state pressure - and now renewed congressional pressure - to provide more charity care to justify their tax exemptions.

In addition to eight hospitals, RHC manages 12 long-term care facilities. It's the largest Catholic health care provider in the region, while Advocate Health Care is the largest nonprofit system.

Earlier this year, both systems agreed to settle lawsuits alleging they overcharged uninsured patients. As part of the agreement, Resurrection informed 220,000 former patients of the terms that offered refunds to some qualified patients. Resurrection also agreed to a 25% discount for uninsured patients.

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