S&P Global Ratings affirms Mountain States Health Alliance's credit rating

Citing "strong management and governance," "continued strong financial performance," improved debt levels and an excellent business position with a robust market share and broad range of services, S&P Global Ratings has affirmed its BBB+ credit rating on Mountain States Health Alliance, and has maintained the health system's stable outlook.Mountain States Health Alliance has maintained its credit ratings uninterrupted for 11 years, even as some rating agencies had downgraded the national not-for-profit hospital sector as a whole, or issued cautious outlooks.• In January, 2017, S&P issued a cautious outlook for the not-for-profit hospital sector. Kevin Halloran, senior director at Standard and Poor's Global Ratings, said in a media call, "Everything we look at from a numbers standpoint almost demands a 'stable' [outlook], and yet there is a sense in the pit of your belly that maybe the sector isn't as stable as the numbers might indicate." Halloran went on to state, "As we look forward, it's our belief that the sector has peaked."[1]• In December, 2016, Fitch Ratings issued its 2017 outlook, stating, "The sector outlook for U.S. not-for-profit hospitals and healthcare remains negative for 2017…" Fitch Ratings further stated, "The number of downgrades is expected to exceed upgrades in the coming year."[2]• In 2012, Moody's Investor Services downgraded a record $20 billion in not-for-profit hospital debt.[3] Subsequently, in December, 2016, Moody's issued a 'stable' outlook for the not-for-profit hospital industry, while stating, "…hospital operating cash flow has moderated to 0-1%. Top-line revenue growth continues to be strong, but constrained increases in reimbursement rates and rising expenses will counteract that growth." The Moody's report further stated, "In addition to rising healthcare costs, bad debt is rising as expected, especially in non-Medicaid expansion states. Rising expenses in the form of higher pharmaceutical, personnel, and pension costs will compress operating margins. Hospitals have been employing more physicians and acquiring physician practices in an effort to manage the transition to population health strategies, such as the introduction of value- and risk-based models. This transition requires significant technological investments."[4]Even as the national rating agencies have warned of potential declining operating performance of not-for-profit hospitals, Mountain States has continued to maintain its ratings and outlook without any downgrade amid strong operating results. Management pointed to improved productivity, expense management, improved documentation better capturing the acuity of patients, and disciplined resource management as the primary drivers for a successful financial result in 2016-2017."We are grateful to S&P Global Ratings for its objective review of our operating performance and outlook," said Mountain States President and Chief Executive Officer Alan Levine. "We are especially pleased with the recognition of the strength of our board, as it has balanced the strategic future of Mountain States with ensuring continuing operating performance. This has been a challenging time for hospitals, but our board has remained steadfast in its support of management, our team members and our physicians."In its report, S&P cited several strengths of Mountain States, including:• Sound business position, consistent operating performance, and improving debt ratios;• Solidly positive operating results over the past three fiscal years;• Strong leadership team;• Demonstrated strong financial leadership;• Solid liquidity based on days cash on hand;• Robust market share and a broad range of services; and• Strong governance.As cited by S&P, Mountain States incurred significant debt during a period of growth as several hospitals were acquired. The S&P report states, "Although we believe [the acquisitions] made the system a stronger competitor, it resulted in high leverage, which has been an impediment to a higher rating. As of June 30, 2017, the system's long-term debt-to-capitalization ratio was 49%, which, due to robust operating cash flow, continues to improve." S&P further noted that "MSHA's debt management plan calls for it to use surplus cash each year to further reduce debt beyond scheduled debt service."Merger with Wellmont Health SystemS&P praised Mountain States' pending merger with Wellmont Health System, stating, "We believe the merger will enhance MSHA's enterprise profile and will create operating and financial synergies, as well as allow the system to better respond to the changing healthcare environment."The current ratings action by S&P is based on its assessment of Mountain States Health Alliance, and not on the combined merged entity, Ballad Health. The management teams of Mountain States and Wellmont met with officials from S&P Global Ratings in September to provide information about the Certificate of Public Advantage that was approved in September by the State of Tennessee, and the teams have also agreed to provide additional financial information at such time as the two systems may do so in compliance with federal anti-trust law. At that time, S&P indicated it will reassess its ratings on the bonds of Ballad Health."The board of Mountain States is pleased that S&P sees, as we have seen, the value of bringing Mountain States and Wellmont together," said Bob Feathers, chair of the Mountain States board of directors. "The board has been focused on ensuring crisp execution of the merger while also encouraging management to continue its high level of operating performance of Mountain States. We are glad S&P has recognized the results of this focus.""The execution of the merger and achievement of the synergies that will be gained by merging is paramount to our success going forward," said Levine. "We understand the rating agencies and our lenders will be focused on the risks related to execution of a merger of this size, and management is committed to ensuring we promptly achieve the objectives of the merger, both for the purpose of improving the health of our region and ensuring the ongoing financial strength of our system."