With new Augusta hospital about to open, MaineGeneral surprised with downgraded credit rating

Posted Sept. 19, 2013, at 4:15 p.m.
Last modified Sept. 20, 2013, at 7:55 a.m.

AUGUSTA, Maine — Moody’s Investors Service on Wednesday reduced MaineGeneral Medical Center’s credit rating, citing a downturn in its financial performance and worries that those challenges will persist as the organization prepares to open its new hospital in November.

Moody’s downgraded the nearly $281 million in bonds the hospital sold in 2011 to fund the construction of its new Augusta hospital, and revised its outlook from stable to negative. The ratings agency downgraded the bonds from Baa3, considered “investment-grade,” to Ba1, considered “speculative-grade.”

Wednesday also happened to be the day Maine paid its share of overdue Medicaid bills to nearly 40 hospitals.

Moody’s attributed the hospital’s financial downturn to low revenue growth due to Medicare and Medicaid cuts, rising bad debt and charity care and lower inpatient volumes. It also mentioned demographic challenges, as an aging population increases the hospital’s exposure to Medicare.

The downgrade “absolutely” came as a surprise, according to Michael Koziol, the hospital’s chief financial officer.

“When we went to the bond market two years ago, the No. 1 concern was construction risk,” because construction projects are notorious for finishing late and blowing their budget, Koziol told the Bangor Daily News on Thursday.

But MaineGeneral Medical Center is on the verge of completing its construction project ahead of schedule and on budget. The planned 640,000-square-foot hospital, which will replace three smaller, aging MaineGeneral facilities in the region, is slated to open Nov. 9.

“We took care of that risk,” Koziol said.

The financial challenges, Koziol readily admits, are real, but it’s not just MaineGeneral feeling the pinch.

“We‘re disappointed Moody’s didn’t see it our way,” he said. “They’re negative on the entire industry.”

In its 2013 fiscal year, which ended June 30, MaineGeneral budgeted to make $16 million, but only made $10.7 million, Koziol said. Projections were off by roughly $5 million, he said, because Medicare cuts were above and beyond what the hospital anticipated, and it faced higher amounts of charity care and bad debt — “all stories that are not unique to MaineGeneral.”

The current fiscal year, which began July 1, will be an anomaly as MaineGeneral absorbs costs associated with moving into its new hospital. The hospital hasn’t shied away from admitting that it anticipates a $17 million loss this fiscal year, Koziol said.

“We knew this bump was coming. We certainly planned for this for some time,” he said. “We did not anticipate the bump in 2013, but we’re well positioned once we open the new hospital to get back to profitability in a relatively short time.”

The downgrade won’t have any immediate effect on the hospital as its bonds were sold in 2011, but it could affect the secondary market for those bonds, according to Michael Goodwin, executive director of the Maine Health and Higher Educational Facilities Authority, which issued the bonds on the hospital’s behalf.

A lower credit rating would affect future bond issuances, but Koziol said the hospital has no immediate plans to take on new debt.

“We have time to recover from this and our expectations are that we will,” he said.

Moody’s did cite several of MaineGeneral’s strengths, including the fact Maine has repaid its $48 million in overdue Medicaid payments to the hospital, which “will help prevent declines in liquidity as the hospital enters the final phase of its construction project.”

Moody’s also cited as a strength that construction of its new facility is “seven months ahead of schedule and on budget,” that it has a conservative debt structure, and that it remains the market leader in the Kennebec Valley.

Moody’s said an upgrade is unlikely in the near term, but that an upgrade in the long term would be considered if the hospital “showed sustained improvement in operating and operating cash flow margins and balance sheet position.”

Further downgrades, however, are also a risk, Moody’s warned, if MaineGeneral doesn’t meet its 2014 budget and doesn’t “demonstrate projected improvement in revenue growth and operating profitability in FY 2015.”

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