Moody's Investors Service said it has downgraded to Baa3 from Baa2 the rating assigned to Good Shepherd Medical Center, Texas's (GSMC) $93.7 million of outstanding bonds issued by the Gregg County Health Facilities Development Corporation.

The rating outlook is revised to negative from stable.

The rating downgrade and the revision of the outlook to negative reflect a material downturn in financial performance in fiscal year 2013 and the departure of nine physicians to a competing hospital.

All references to financial and utilization numbers below refer to Good Shepherd Health System (GSHS) unless otherwise noted. The numbers cited below for fiscal year (FY) 2013 are based on unaudited, GSHS internally-prepared financially statements.

The rating downgrade reflects GSHS's material decline in financial performance in FY 2013, sizeable patient volume losses, and physician departures.

The negative outlook reflects the increased competitive environment, as the competing hospital in Longview recently expanded its campus and recruited away several physicians from GSHS's medical staff. A return to a stable outlook would be contingent upon a material improvement in operating performance, with a return to historical levels of profitability, as well as preservation or growth of cash balances.

Favorable factors that mitigate the above-mentioned credit risks include no new debt plans or major capital plans for the next two to three years and the lack of sizeable off-balance sheet operating leases and no large unfunded pension liabilities as the organization does not provide a defined benefit pension plan for its employees. In addition, the GSHS management team has implemented a performance improvement plan which management expects will bring the organization back to profitability in 18 to 24 months.

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