EMHS credit rating downgraded

Posted Feb. 06, 2009, at 8:37 p.m.

BREWER, Maine — Standard & Poor’s financial services agency has downgraded Eastern Maine Healthcare Systems’ credit rating from A-plus to A-minus, largely based on the more than $115 million in backlogged Medicaid payments owed to the seven EMHS member hospitals by the state of Maine.

In addition, EMHS has experienced “weakening profitability” for the last three years and is operating at a loss in the current fiscal year, according to a report from Standard & Poor’s dated earlier this week.

The rating change will make it more costly for EMHS and its affiliates to borrow money for big-ticket purchases and construction, said Dan Coffey, vice president and chief financial officer at EMHS.

“This is a measurement of the creditworthiness of the entire system,” he said.

A state official said Friday that Gov. John Baldacci is committed to paying off old MaineCare debts to hospitals, but she questioned whether that debt should be blamed for EMHS’ rating drop.

“This is a long-standing problem and it hasn’t affected their bond rating before,” said Trish Riley, director of the Governor’s Office of Health Policy and Finance. Riley stressed the impact of the unstable state and national economies on all hospitals.

“A-minus is still a good, good rating,” she said.

Riley noted that language in the supplemental budget approved by state lawmakers last month would make it a priority to use a portion of anticipated federal economic stimulus funds to pay off some of the MaineCare debt to hospitals.

“No one disagrees this is a problem,” she said. “But we can’t spend the stimulus money before we get it.”

EMHS has maintained an A-plus rating since 2000, Coffey said. Last year, the overall rating was upheld despite Standard & Poor’s downgrade of the organization’s financial outlook from “stable” to “negative,” he said. That change reflected growing regional economic distress and a reduction in financial liquidity, or cash on hand, as well as developing budget problems within the organization, Coffey said.

“It was a combination of things, but liquidity is the most alarming [to Standard & Poor’s],” Coffey said.

That liquidity is profoundly affected by the more than $115 million Maine owes to the seven member hospitals in the EMHS system, according to Coffey, including more than $71 million owed to Eastern Maine Medical Center in Bangor, the system’s largest facility.

Standard & Poor’s credit analyst Cynthia Keller Macdonald said in the report that EMHS was spared a steeper drop in its rating because of its prior financial performance and the essential nature of the health care services it provides in the large geographic area it serves.

“This may not preclude a lower rating in the future if earnings do not rebound this year, if liquidity continues to diminish, or if debt or debt plans increase,” Keller Macdonald said. The report cites a planned $200 million expansion at EMMC, largely dependant on borrowed money, as a financial liability supporting the lowered credit rating.

“A stable outlook is possible if management decides not to proceed with a large project within the next several years and would therefore not be issuing substantial additional debt, or if the state makes substantial progress toward reducing its MaineCare receivables,” the report states.

Coffey said EMHS operated at a $1.2 million loss in the first quarter of the current fiscal year, which began Oct. 1. Cost-cutting measures are being implemented across the system in an effort to reverse the trend, he said, and all aspects of the planned expansion are under close review.

The total amount of unpaid MaineCare revenues owed to Maine hospitals is now about $424 million and continues to build each year, according to Mary Mayhew of the Maine Hospital Association.

The debt results from the state’s failure over the past several years, due to the strained fiscal environment in Augusta, to make up the difference between what it pays hospitals up front for MaineCare services each year and the value of the services actually provided.

“There is a considerable difference between what hospitals are paid and the number of [MaineCare] patients they see,” Mayhew said Friday.

The unpaid revenues date back as far as 2001, but the bulk of the claims date from 2005, 2006, 2007 and 2008. Mayhew said the estimated shortfall between what Maine hospitals were paid in 2008 and what they were owed is about $86 million.

Maine’s smaller hospitals do not have individual credit ratings, but instead borrow through the Maine Health and Higher Educational Facilities Authority, which issues tax-exempt bonds to private, nonprofit education and health care institutions, according to Mayhew.

In 2006, Baldacci and the Maine Hospital Association announced a three-year plan to pay off the MaineCare debt, which at that time was about $300 million. Mayhew said the governor continues to demonstrate his support for paying Maine hospitals the money they are owed, and she expressed optimism that federal stimulus funding, when it becomes available, might be used.

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