Fitch Affirms Weirton Medical Center

July 26, 2011

13 Jul 2011 4:57 PM (EDT) Fitch Ratings-New York-13 July 2011: EXCERPT

RATING RATIONALE:

The revision of the Outlook to Stable reflects the traction of a turnaround plan that has cut operating losses by more than half through the 11-month interim period (June 30 year-end), reducing a $4.2 million operating loss to a $1.7 million loss, year over year.
The turnaround plan has been led by Quorum Health Resources (QHR), which has just finished the first year of a two year engagement, with many of the initiatives around revenue cycle, payor contracts, and denial management expected to have a fuller positive effect on operations in fiscal 2012 and in subsequent operating years.
Inpatient utilization a major credit concern last year as it dropped nearly 12% from fiscal 2009 to 2010 has stabilized dropping about 1% through the interim (more in line with national trends) and recent physician recruitment efforts adds further credence to Weirton’s ability to maintain this stability.
Weirton, which failed to meet its debt service coverage covenant at June 30, 2010, received a waiver for the violation, is currently in compliance, and expects to end the year in compliance with the debt service covenant.
Weirton’s liquidity remains a primary credit strength, with its liquidity metrics all very strong for the rating level.
Credit concerns include: the socioeconomic characteristics of the primary service area, which are below national averages and lead to a high level of Medicaid, self-pay and bad debt; Weirton’s variable debt exposure (approximately 54%), supported by a letter of credit (LOC) that requires yearly renewals; and deferred capital spending, as reflected in Weirton’s high average age of plant, 29.8 years.

CREDIT SUMMARY:

The affirmation and revised Outlook to Stable reflects the improved operating performance at Weirton, driven by a turnaround plan being implemented at Weirton by QHR. On May 1, 2010, Weirton’s board hired QHR for a two-year engagement. QHR brought on a CFO, COO, interim CNO, and additional consultants and began to evaluate and revamp revenue cycle management, payor contracts, human resources, labor negotiations, and case management.

While Weirton is still operating at a loss, the operating loss has been cut by more than half through the 11-month interim period, and Weirton is exceeding budget. At May 31, 2011, Weirton’s operating margin was a negative 2% compared to a negative 4.8% for the same period in fiscal 2010. Revenue is up by about a half percent through the interim period after being down approximately 8% from fiscal 2009 to fiscal 2010. Moreover, the positive effect of many of the initiatives that QHR has implemented will be felt more fully in fiscal 2012, led by improvements to payor contracts and better case management.

Weirton is budgeting for $335,000 in operating income for fiscal 2012; Fitch believes this can be achieved. In addition to the QHR initiatives, Weirton has had physician recruitments gains in orthopedics and obstetrics, as well as has plans to replace its current Cath Lab with state of the art Phillips technology in October 2011. The potential positive effect of the newly recruited physicians has been conservatively incorporated into the 2010 budget, with Weirton budgeting for flat volumes. Inpatient admissions were a major concern for the last rating action as it declined 11.7% (not including inpatient psychiatry which was discontinued in the first quarter of 2010). Through the interim period, inpatient admissions declined 1.3%, a decline much more in line with declines nationally. Emergency room admissions, which had also declined, has shown modest growth year over year.

Liquidity remains a major credit strength, as it mitigates the risk of Weirton’s variable rate debt structure and continues to provide a cushion as the turnaround plan progresses.

Unrestricted cash and investments stood at $35.6 million at May 31, 2011, equal to 152 days cash on hand, a 12x cushion ratio, and 138.5% cash to debt, all of which are characteristic of an investment grade credit.

Credit concerns include WMC’s variable rate debt exposure, poor service area characteristics, and high average age of plant. WMC’s service area can be characterized by socioeconomic indicators generally worse than U.S. averages, as well as high unemployment rates within the metropolitan statistical area, ranging from 11% to 12%. These factors present significant challenges from a reimbursement standpoint as self-pay and Medicaid represents roughly 9% and 13% of gross revenues, respectively, while Medicare accounts for an additional 45%. Bad debt as a percentage of revenue is also high, hovering near 11%.

WMC is a 238-bed acute care hospital located in Weirton, WV, approximately 35 miles west of downtown Pittsburgh. The hospital had total revenues of $94.6 million in fiscal 2010 and $87.1 million through the 11 month interim period.