BRADENTON, Fla. - Standard & Poor's downgraded bonds issued for Tuomey Healthcare System in South Carolina two notches, to CC from CCC, citing the hospital's plan to file for bankruptcy.

The downgrade applies to $52 million of outstanding revenue bonds issued in 2006 by the South Carolina Jobs Economic Development Authority. The outlook is negative, S&P said in a May 2 report.

Tuomey is in a lengthy legal dispute with the federal government over violations of the Stark Law and the False Claims Act in which the government won a $237 million judgment against the hospital.

The downgrade is the result of S&P's assessment of a statement made by Tuomey's board of trustees in an April 30 market disclosure that hospital intends to file for Chapter 11 bankruptcy if Tuomey's motion for stay is denied or the court grants a stay on conditions that are more burdensome, among other factors, the rater said.

After the judgment was entered in September, the court ordered Tuomey to post as security a $30 million bond and to place $40 million in escrow in order to stay the $237 million judgment and proceed with an appeal. The hospital then filed a motion to delay the court's order for the additional security.

"We believe Tuomey would significantly deplete its financial profile if it were required to post funds for a $30 million bond and a $40 million escrow," said analyst Margaret McNamara.

If the court denies a stay on the security, S&P believes that Tuomey will not be able to satisfy its bond covenants, she said.

"While Standard & Poor's understands Tuomey is continuing to work toward a settlement regarding the amount it is required to post, significant uncertainty remains as to whether the parties will reach an agreement," McNamara said.

The CC rating indicates that the bonds are highly vulnerable to nonpayment, specifically because of Tuomey's disclosure about its potential bankruptcy filing, said S&P.

In a case that has spanned nine years, a federal jury found Tuomey's compensation arrangements with 19 referring physicians that had part-time employment agreements were unlawful under the Stark Law, resulting in nearly 22,000 violations of the False Claims Act and more than $39 million in overpayments by Medicaid and Medicare.

After a second trial in a whistleblower case filed under the False Claims Act, a federal district court ordered Tuomey to pay more than $277M in fines and penalties for the improper Medicaid and Medicare reimbursement. The amount was revised to $237 million after it was determined that the initial amount was incorrectly calculated.

In addition to the 2006 bonds, Tuomey also has $21 million of unrated 1998 bonds insured by Amfac Assurance Corp. and $16.4 million of unrated, uninsured bonds that it repurchased in 2010.

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