KDMC's overall operating risk assessment is assessed as midrange based on Fitch's view that the medical center will improve operating EBITDA margins in the near future, allowing it to begin increasing capital outlays following years of growing future investment needs from years of low capital reinvestment.
With cash to adjusted debt in the outer year of the rating case at roughly 76% and net adjusted debt to adjusted EBITDA of 1.1x, KDMC's leverage metrics reflect the minimum levels for an investment-grade credit given the midrange assessment for the rating defensibility and operating risk drivers.
KDMC has an additional termination event below 'BBB-' on one of its outstanding swaps, which may require a cash payment of approximately $11.6 million (mark-to-market value as of the end of March) should any of its three rating fall to non-investment grade.
CASH/OPERATING RISK ASSESSMENT: Rating upside for King's Daughters Medical Center (KDMC) is mostly dependent on the organization's ability to grow excess cash after funding future capital expenditures at higher levels than in the past five years.
KDMC operates a 465-staffed bed regional tertiary referral center located in Ashland, KY, approximately 120 miles east of Lexington, KY and 120 miles south of Columbus, OH.
KDMC's payor mix is heavily dependent on Medicaid (almost 24%) but low self-pay exposure as a result of the state's Medicaid expansion in 2014.
KDMC is budgeting for the uncertainty and developing strategies to keep patients in the program if possible.
KDMC has the leading market share in its six county primary service area (PSA) with a total market share of 29.3% in calendar year 2017 and up from 28.3% in 2016.
While KDMC increased its market share in fiscal 2017, Fitch believes that significant incremental market share will be difficult for KDMC to obtain without consistent strategic investments.
The DOJ initiated an investigation of KDMC in 2011 for alleged violations of the False Claims Act related to KDMC's levels of cardiac stent and catheter procedures between 2006 and 2011.
KDMC reported material decreases in inpatient and outpatient utilization as a result of the reputational damage in the community during the DOJ investigation period.
The investment in physicians resulted in financial losses in 2017 and KDMC plans to slow down continued physician employment, other than for hospitalists.