By David Pendered
As state lawmakers look “revolutionize” health care delivery in Georgia, a hospital authority in a rural part of the state has faced a double whammy of a credit downgrade and a reaffirmation of a negative outlook on its ability to repay about $72 million of borrowing in 2007 to finance an expansion.
Possibly by the end of this week, legislation is to be introduced at the General Assembly that is expected to call for much greater transparency and significant structural changes in the management of non-profit hospitals. The new proposals are being drafted in the wake of a report submitted in December 2018 by the House Rural Development Council, which observed:
- “The current system for health care delivery must be revolutionized to provide the level of access, quality and cost controls that support better health outcomes for Georgians.”
The new credit rating was applied to debt sold by the Hospital Association of Houston County, which has issued about $72 million in bonds on behalf of Houston Healthcare. The debt is related to a prior debt taken on in 2007 that, according to bonds’ initial statement, was to be used to finance, “the acquisition, construction, installation and equipping of certain additions and improvements to Houston Medical Center and related facilities owned by the Hospital Authority of Houston County, Georgia.”
The credit rating for Houston Healthcare’s debt now is one step above that of bonds viewed as, “speculative and are subject to substantial credit risk,” according to the Jan. 22 rating action issued by Moody’s Investors Service.
According to its 2016 tax return, the latest posted on guidestar.com, Houston Healthcare reported a shortfall of $1.9 million for the year ending Dec. 31, 2016:
- Total revenues: $913,343
- Total expenses: $2,844,172.
Among the expenses cited in the tax return:
- $2.3 million was allocated to salaries, other compensation and employee benefits;
- $359,415 was allocated to CEO Cary Martin in reportable compensation from related organizations; Martin also received $14,026 in estimated other compensation from the organization and related organizations.
Moody’s lowered the bonds’ rating to Baa3 from Baa1. The shift from the highest to the lowest rank in the Baa rating means the bonds are deemed to be of medium grade and subject to moderate credit risk, according to Moody’s rating scale.
But the outlook isn’t positive, meaning that analysts with Moody’s are warning investors the healthcare system may not be able to meet its payment obligations:
- “The negative outlook reflects expectations of weak financial performance and heavy reliance on investment returns until financial performance improves. We are not factoring in a potential partnership with Navicent Health at this time. A decline in liquidity will pressure the rating.”
Macon-based Navicent and Houston Healthcare have been in discussions for more than a year. In December 2018, the two convened a public hearing at which the institutions emphasized they are considering a partnership, not a merger, according to a report by the local CBS affiliate, 13WMAZ.
Navicent reported net earnings of $2.9 million in the tax year ending Sept. 30, 2017, according to its tax return as posted on guidestar.com. That represented total revenue of $99.2 million and total expenses of $96.3 million. Salaries, other compensation and employee benefits accounted for $63.5 million of expenses.
Competition from Navicent and other health care providers in the Macon area was cited in the report from Moody’s. Though the partnership with Navicent didn’t factor into the rating action, analysts cited Macon providers in the rating rationale:
- “The downgrade to Baa3 reflects Houston Healthcare’s wide variance to budget expectations in fiscal 2018, resulting in narrow coverage of debt service and heavy reliance on investment income to meet the debt service covenant requirement. Such reliance will continue until expense strategies yield better results.
- “Improvement over the near term will be challenged by volume instability, labor shortages, and encroaching competition from Macon providers. The system presently maintains strong liquidity metrics relative to debt and daily operations which supports the investment grade rating.”