The Healthcare "Three R's":Regulation - Reform - Reimbursement 

Rating Agency Outlook

Kaufman Hall and AssociatesAugust 22, 2014

2

Discussion Agenda

• Background and Methodology• Standard & Poor’s Medians• Moody’s Medians• Fitch Medians

3

RATING AGENCY: BACKGROUND AND METHODOLOGY

4

Key Themes from Rating Agencies

• All rating agencies give the health care industry a negative outlook

• Increasing challenges in preserving profitability – inpatient volumes pressured, increasing use of high-deductible health plans, Medicare and other payers with lower than historical rate increases

• Harder-to-find cost savings• Uncertainty about the Affordable Care Act• Focus on management to navigate the changing environment• Strategic partnerships will continue

5

Why Does a Credit Rating Matter?

• Creditworthy organizations have improved capital market and borrowing opportunities– Less restrictive bond covenants– Access to a wider range of lending institutions– Avoidance of a debt service reserve fund

• Creditworthy organizations have a lower cost of capital– A” vs. “BBB” historical interest rate spread range of approximately 75+ bps– Access to a variety of debt options

• Creditworthy organizations are market consolidators– Nationwide, organizations with the highest credit ratings have been the most

attractive partners, have excess capital capacity and the lowest cost of capital to consolidate the market

6

Negative Outlooks Reflect Accelerating Industry Pressures

“…negative sector outlook reflects the forces of pressure weighing on the sector (lower reimbursement, suppressed inpatient volumes, higher deductible plans and additional spending cuts) as it enters this potentially historic period of change”

Fitch, December 11, 2013

“The negative outlook is due to a multitude of factors, including: top line revenue constraints, the impact of health care reform readiness activities, soft demand, and emerging changes to the payment environment"

Standard & Poor’s, December 10, 2013

“Our sector outlook for not-for-profit hospitals remains negative reflecting the challenging operating landscape over the next 12-18 months as patient volumes shrink and revenue growth slows"

Moody’s Investors Service, November 25, 2013

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Rating Agency Perspective: Key Drivers

•Economy: unemployment, state budges, healthcare funding•Utilization: flat to declining industry-wide•Reimbursement: pressure on rates and what’s reimbursed•Expenses: vs. revenue growth, continued reduction efforts•Payer mix: government, commercial, cost shifting•Physician alignment: investment and operating losses•Healthcare reform: uncertainty and bi-modal transition period•New market entrants: private equity, for-profits, insurers, retail•Consolidation: search for scale leading to rapid consolidation

8

Credit Ratings Are Influenced by Range of Factors

• Financial performance, trends, and expectations

• Strategic and financial planning

• Governance/ management

• Market position

• Payor mix

• Physician relations

• Debt and capitalization position

• Size and critical mass which mitigate risk

• Number of physical locations for diversification

• Industry trends and external perception of risk

Can be influenced in short-term

Cannot be influenced in short-term

9

Distribution of Tax-Exempt Healthcare Ratings

Note (1): Based on Moody’s most recent not-for-profit healthcare median report published August 2013Note (2): Based on S&P’s most recent not-for-profit stand-alone hospital median reports published August 2014Note (3): Based on Fitch’s most recent not-for-profit healthcare median report published August 2014

Aa2Aa3A1A2A3Baa1Baa2Baa3Ba1Ba2Ba3B1B2B3

Non Investment Grade Investment Grade

AAAA-A+AA-BBB+BBBBBB-BB+BBBB-B+BB-

Moody’s

S&P, Fitch

Fitch

S&P

Moody

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

6%

10%

9%

28%

35%

27%

41%

47%

49%

25%

8%

15%

Non-IG BBB / Baa A AA / Aa

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RATING AGENCY – STANDARD & POOR’S (S&P)

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Standard & Poor’s

• 2013 ratings published August 13, 2014• Provides separate ratings for Stand-Alone Hospitals and Health Systems• The distribution of System ratings continues to be of significantly higher

credit quality than that of Stand-Alone providers, with the majority of ratings in the 'AA' category and the higher end of the 'A' category, while the 'A' and 'BBB' categories dominate the stand-alone realm

• In S&P’s opinion, systems remain better positioned than stand-alone providers to manage and adapt to industry forces, in part, due to the benefits of revenue and geographic diversity, overall scale, and capability to attract and retain top-tier physicians and management, all of which compensate for the systems' slightly weaker financial metrics in 2013

12

Standard & Poor’s Distribution of Ratings

AA AA- A+ A A- BBB+ BBB BBB- Spec0%

5%

10%

15%

20%

25%

Stand-AloneSystem

Stand-Alone vs. System Rating Categories

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Standard & Poor’s 2013 System Medians

• The 2013 medians for U.S. not-for-profit health care systems reflect a decline in operating performance for the first time since 2008 due to operating expenses that outpaced patient revenue growth.

• Strong investment returns not only helped offset reduced margins, but they also bolstered many balance-sheet metrics with stronger unrestricted reserves and improved pension results. Increased balance-sheet strength in turn enhanced financial flexibility, enabling many health systems to absorb the impact of changing dynamics in health care delivery and reimbursement.

14

Standard & Poor’s 2013 System Medians (continued)

• While revenue in 2013 grew at a faster pace than we expected, with an overall increase of 5%, expenses rose even more at 7%. This marks another year of patient revenue growth for systems, although we find the increase is tied less to volume growth and more to mergers and acquisitions, increased physician employment, which added hospital referrals as well as revenue from the owned practices, and special funding mechanisms such as provider fees and meaningful use technology funds from the government.

• The growth in expenditures reflects higher operating costs to prepare for health care reform, including technology investment and consulting fees, higher physician costs, provider taxes paid, and increased salaries and pharmaceutical costs.

15

Standard & Poor’s System Profitability Trends

2007 2008 2009 2010 2011 2012 20130.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Operating Margin Operating EBIDA Margin Excess Margin

16

Standard & Poor’s System Liquidity Trends

2007 2008 2009 2010 2011 2012 2013 -

50

100

150

200

250

181 154 154

175 189 194 205

Days Cash on Hand

Days Cash on Hand

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Standard & Poor’s System Rating and Outlook Actions

Downgrades Upgrades Negative Outlook Actions

Positive Rating Actions

-

2

4

6

8

10

12

14

16

201120122013

System Rating and Outlook Actions

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Standard & Poor’s System Outlook

• Expects continued compression in operating margins in 2014 due mainly to inpatient volume decline.

• Anticipate nonoperating revenues, specifically investment earnings, will continue to grow, given that year-to-date investment market performance has remained sound.

• See that many cost escalators in 2013 have continued into 2014, including further operating costs to support infrastructure development, physician employment, joint-venture relationships, and mergers and acquisitions. These costs are likely to affect next year's medians as well.

• One bright spot may be what we believe is a near-to-medium-term spike in volume from Medicaid expansion and exchange patients. Under the Affordable Care Act, providers could see a drop in charity care and bad debt expenses, although there may be some offsetting increases from patients unable to afford high deductibles and copayments associated with their new insurance coverage.

• In addition, with continued merger and acquisition activity, health systems are creating opportunities to achieve cost reductions through increased economies of scale and regional clout.

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S&P Rated Systems in Maryland

System Rating Outlook

Bon Secours Health System A- Stable

Johns Hopkins Health System AA- Stable

MedStar Health A- Stable

University of Maryland Medical System A- Stable

Rating as of August 13, 2014

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Standard & Poor Stand-Alone Medians for 2013 ($ millions)

S&P S&P S&P S&P S&P S&P S&P S&P S&P

AA AA- A+ A A- BBB+ BBB BBB- Spec

Sample Size 12 16 60 49 60 39 46 42 38 Net Patient Revenue $1,092.8 $760.3 $480.5 $407.1 $295.0 $282.1 $160.3 $175.8 $127.8Unrestricted Cash $1,198.9 $697.7 $398.9 $253.6 $171.9 $138.9 $75.7 $59.6 $29.1

ProfitabilityOperating Margin 5.4% 5.7% 4.0% 2.4% 2.3% 1.4% 1.2% 1.0% (2.8%)Operating EBIDA Margin 12.0% 12.0% 10.9% 9.5% 9.3% 8.2% 8.8% 8.0% 4.9%

Debt PositionDebt Service Coverage 6.3 6.0 4.9 4.4 3.4 3.3 2.5 2.6 1.7Debt to Capitalization 21.4% 23.6% 26.7% 27.6% 35.2% 34.2% 37.9% 37.5% 49.8%

LiquidityCash to Debt 285.1% 237.0% 185.8% 179.1% 139.0% 123.3% 103.9% 103.1% 56.6%Days Cash on Hand (days) 393.4 307.9 290.9 245.6 191.6 187.3 161.4 127.2 95.2

OtherCapital Spending Ratio 152.7% 148.1% 118.0% 127.4% 123.5% 112.9% 99.4% 85.5% 81.0%Compensation Ratio 58.3% 56.6% 53.7% 56.8% 57.1% 55.7% 56.5% 56.2% 55.2%

Medians based on and S&P Stand-Alone Median Ratios for Nonprofit Hospitals for Fiscal Year 2013 (published in 2014).

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Standard & Poor’s Stand-Alone Hospital Profitability Trends

2008 2009 2010 2011 2012 20130.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Operating Margin Operating EBIDA Margin Excess Margin

22

Standard & Poor’s Stand-Alone Hospital Liquidity Trends

2008 2009 2010 2011 2012 2013 -

50

100

150

200

250

146 152 165

187 192 198

Days Cash on Hand

Days Cash on Hand

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Standard & Poor’s 2013 Stand-Alone Medians

• The 2013 median ratios for stand-alone hospitals were mixed, with weaker operating margins offset by balance-sheet improvement.

• Balance-sheet measures improved for the most part, with an increase in unrestricted reserves despite softer operating income as many providers enjoyed favorable investment returns.

• This is reflected in improved nonoperating income, which has boosted excess income from a year earlier. However, unrestricted reserves to operating expenses, as measured by days' cash on hand, was mixed at some rating levels.

• The growth in nonoperating income also highlights a growing dependence on nonoperating income, which leaves many providers exposed to uncertain investment markets.

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Standard & Poor’s Stand-Alone Hospital Medians

AA AA- A+ A A- BBB+ BBB BBB- Spec -

10

20

30

40

50

60

70

80

20122013

Distribution of Ratings

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Standard & Poor’s Stand-Alone Hospital Medians

AA AA- A+ A A- BBB+ BBB BBB- Spec $-

$200

$400

$600

$800

$1,000

$1,200

20122013

Net Patient Revenue

26

Standard & Poor’s Stand-Alone Hospital Medians

AA AA- A+ A A- BBB+ BBB BBB- Spec

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

20122013

Operating Margins

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Standard & Poor’s Stand-Alone Hospital Medians

AA AA- A+ A A- BBB+ BBB BBB- Spec2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

20122013

Operating EBIDA Margins

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Standard & Poor’s Stand-Alone Hospital Medians

AA AA- A+ A A- BBB+

BBB BBB- Spec$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

2012 Cash2013 Cash

Unrestricted Cash

29

Standard & Poor’s Stand-Alone Hospital Medians

AA AA- A+ A A- BBB+ BBB BBB- Spec$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

$450.0

20122013

Days Cash on Hand

30

Standard and Poor’s Contemplated Updated Rating Methodology

“The criteria establishes a formal framework for performing credit analysis using the same elements that have long been a part of our analysis and that are routinely discussed in our rating committees.” – Standard & Poor’s, December 5, 2013• Basic framework uses a weighted average of an enterprise and financial profile

score• Financial Profile

– 40%: Financial Performance– 30%: Liquidity & Financial Flexibility– 30%: Debt & Contingent Liabilities

• After these scores are accumulated, certain positive and negative factors outside the outlined framework are assessed– Management strength, close affiliation with strong organizations (ex. AMC with a

University), specialty designations, etc.

• Enterprise Profile

– 20%: Industry Risk

– 20%: Economic Fundamentals

– 50%: Market Position

– 10%: Management & Governance

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Preliminary S&P Rating Analysis: Financial Profile

Sample HospitalWeight FY 2011 FY 2012 FY 2013 Value Score

I. Financial Performance 40%Net Patient Service Revenue ($M) 16.7% 689.6 735.2 758.2 736.4 2EBIDA Margin 16.7% 5.2% 8.5% 7.2% 7.2% 6Operating Margin 16.7% -0.5% 2.2% 1.0% 1.1% 4Excess Margin 16.7% -2.2% 0.8% 4.2% 1.7% 5Maximum Annual Debt Service Coverage 16.7% 2.0 3.6 3.0 3.0 4Lease-adjusted MADS Coverage 16.7% 1.3 2.6 1.8 2.0 5

Initial Score: 4.33

II. Assessing Liquidity and Financial Flexibility 30%Average Age of Plant (yrs) 15% 16.1 11.7 10.3 12.0 4Capital Expenditures/Depreciation Expense 15% 211.7% 75.6% 93.6% 110.9% 4Cash on Hand (Days) 30% 100.4 102.2 106.1 103.6 5Unrestricted Reserves/Long-Term Debt 30% 70.3% 75.4% 80.4% 76.6% 5Unrestricted Reserves/Contingent Liabilities 10% 87.7% 92.5% 100.8% 95.3% 5

Initial Score: 4.70

III. Assessing Debt and Contingent Liabilities 30%Debt Burden 25% 2.5% 2.4% 2.4% 2.4% 2Long-Term Debt/Capitalization 25% 79.8% 81.5% 60.0% 71.5% 6Contingent Liabilities/Long-Term Debt 25% 82.1% 83.7% 82.4% 82.8% 6Funded Status (DB Pension) 25% 52.6% 52.6% 65.5% 58.4% 5

Initial Score: 4.75

Initial Financial Profile Score 4.57

FY11 to FY13 (weighted)

32

Preliminary S&P Rating Analysis: Enterprise Profile

Sample HospitalValue Score

I. Industry Risk 20% N/A 3Initial Score: 3

II. Economic Fundamentals 20%Primary Service Area Population 100% 1,200,000 2

Initial Score: 2

III. Market Position 50%Market Share 50% 25% 3Medical Staff 20% N/A 3Payer Mix 15% N/A 4Clinical Quality and Information Technology 15% N/A 3

Initial Score: 3

IV. Management and Governance 10% N/A 2

Initial Score: 2

Initial Enterprise Profile Score 2.78

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Preliminary S&P Rating Analysis: Indicative Rating

1 2 3 4 5 6

1 AAA AA+ AA- A- BBB+/BBB BB+/BB

2 AA+ AA/AA- A+ A- BBB/BBB- BB/BB-

3 AA- A+ A BBB+/BBB BBB-/B+ BB-

4 A A/A- A-/BBB+ BBB/BBB- BB B+

5 BBB+ BBB/BBB- BBB-/B+ BB BB- B

6 BBB- BB BB- B+ B B-

Sample Hospital

Financial Profile

En

terp

rise

Pro

file

34

Standard & Poor’s Stand-Alone Outlook

• S&P expects the trend in weaker operating margins to continue as providers are facing mounting challenges, including weaker volume trends, increased integration costs relating to physician employment, and substantial investments in technology amid an evolving reimbursement environment due to health care reform.

• S&P expects these trends will continue to pressure the sector over the next several years especially given the difficulty of finding the next level of expense cuts to offset the investments providers need to make to maintain their financial stability.

• S&P believes the sector is at a tipping point where negative forces have started to outweigh many providers‘ ability to implement sufficient countermeasures.

35

S&P Rated Stand-Alone Hospitals in Maryland

System Rating Outlook

Anne Arundel Health System A- Stable

Greater Baltimore Medical Center A Stable

LifeBridge Health, Inc. A Positive

Mercy Health Services BBB Negative

Meritus Health, Inc. BBB- Stable

Peninsula Regional Medical Center A Stable

Rating as of August 13, 2014

36

RATING AGENCY – MOODY’S INVESTORS SERVICE

37

Moody’s Medians for 2012 ($ millions)

Moody's Moody's Moody's Moody's Moody's Moody's Moody's Moody's Moody's

"Aa2" "Aa3" "A1" "A2" "A3" "Baa1" "Baa2" "Baa3""Below Baa"

Net Patient Revenue $2,329.7 $1,379.9 $746.6 $464.7 $391.9 $446.4 $252.0 $206.7 $202.5Unrestricted Cash $2,824.4 $1,055.7 $536.4 $279.0 $194.2 $175.8 $102.4 $76.1 $42.3

ProfitabilityOperating Margin 3.9% 3.5% 3.6% 3.2% 1.9% 1.2% 1.2% 1.2% (1.8%)Operating EBIDA Margin 10.8% 10.4% 10.9% 10.2% 10.0% 7.8% 8.8% 7.9% 4.7%

Debt PositionDebt Service Coverage 9.2 7.0 5.4 5.6 4.2 3.5 3.0 3.5 2.2Debt to Capitalization 29.7% 31.8% 34.7% 37.3% 41.0% 47.4% 49.3% 47.6% 57.8%

LiquidityCash to Debt 222.2% 177.4% 151.1% 139.5% 112.7% 92.0% 81.6% 86.4% 55.9%Days Cash on Hand (days) 289.9 239.1 218.8 207.9 175.9 149.0 139.5 132.9 80.1

OtherCapital Spending Ratio 132.9% 143.5% 123.8% 121.2% 113.6% 125.6% 105.5% 85.9% 95.8%

Medians based on and Moody’s Nonprofit Hospitals and Healthcare Systems for Fiscal Year 2012 (published in 2013).

38

2012 Moody’s Rating Distribution by Revenue Size

$250M- $500M

$500M- $1.0B $1.0B- $2.0B $2.0B- $4.0B $4.0B+0%

25%

50%

75%

100%

Source: Information supplied by Moody’s Investors Service based upon 2008-2012 published ratios.Aa A Baa Non-IG

110 86 62 41 22

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Moody’s Healthcare Scorecard - Overview

• Moody’s updated their methodology in March 2012 and released a rating methodology report explaining their approach to assigning ratings to not-for-profit providers– As part of the report, Moody’s included a scorecard that has a weighted quantitative grid

• The report also included a set of qualitative factors that can impact the rating– Subjective and weights vary from credit to credit– As guidance, these factors can impact the rating by one notch but there is no exact weight

for each sub-factor• In addition to an updated rating methodology, Moody’s is currently tracking key

ratios and statistics not previously tracked– Unique patients, Medicare readmission rates, Readmission rate, Total case mix index, #

of employed physicians, Worked RVUs for employed physicians, active medical staff (independent & employed)

– Each indicator is meant to give insight as to the organizations ability to succeed in a new value based/post reform healthcare environment

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Factor 1: Market Position (45%)

Total Revenue ($000's) 25% 784,135 5.43 A1

Revenue Growth Rate (%) (3 yr CAGR) 10% 3.0 9.51 Baa3Medicare and Medicaid payer mix (% of Gross Revenues)

Medicare 5% 44.1 7.28 A3

Medicaid 5% 21.9 10.75 SG

Factor 2: Operating Performance (30%)

Operating Cash Flow Margin (%) 10% 7.20 8.70 Baa2

Debt to Cash Flow (x) 10% 7.50 10.08 Baa3

MADS Coverage (x) 10% 3.70 7.20 A3

Factor 3: Balance Sheet and Capital Plan (25%)

Days Cash on Hand (x) 10% 99 8.85 Baa2Cash to Debt (%) 10% 75 9.02 Baa2

Monthly Liquidity to Demand Debt (%) 5% 0.94 20.90 SG

Sub-Factor Weights

Implied Rating

ScoreValue

Moody’s Healthcare Scorecard – Quantitative Factors

Sample Hospital – FYE 2013

Weighted Score: 8.64

Grid Rating Baa2

Weighted Score Legend

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 SG> 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5≤ 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5

41

Moody’s Healthcare Scorecard – Qualitative Factors

• These factors can impact the rating by one notch each (up to three notches total), but there is no exact weight for each sub-factor

4) Governance and Managementa. Composition of Board and Senior Management

b. External Disclosures and Internal Controls

c. Integrated Short and Long-Range Planning

d. Ongoing Self-Assessment and Benchmark ing

e. Government and Stakeholder Relations

5) Debt Structure and Legal Securitya. Interest Rate, Counterparty, and Refinancing Risk

b. Borrowing Terms and Covenants

c. Legal Security and Other Bondholder Protections

Other Credit Specific Considerationsa. Multi-year Trend in Key Operating and Balance Sheet Factors

b. Ownership and Support by University or State/Local Government

c. Presence or Absence of CON

d. Market Sharee. Other Factors (ex: Comprehensive Debt)

Analyst Notching

(+/-)

Positive, Negative, or

Neutral

Factors 4 & 5: Governance, Management, Debt Structure and Other Debt Structure Specific Considerations

0.0Net Notching →

42

RATING AGENCY – FITCH RATINGS

43

Fitch Medians for 2013 ($ millions)

Fitch Fitch Fitch Fitch Fitch Fitch Fitch Fitch

AA AA- A+ A A- BBB+ BBB BBB-

Sample Size 14 45 31 38 30 41 18 10 Operating Revenue $2,588.5 $1,484.1 $695.6 $545.7 $479.0 $431.0 $306.8 $341.6

ProfitabilityOperating Margin 6.0% 3.9% 3.7% 2.0% 2.2% 0.7% 1.0% 2.5%Operating EBIDA Margin 11.7% 10.9% 10.4% 9.3% 9.1% 7.8% 8.0% 8.4%

Debt PositionDebt Service Coverage 5.5 5.3 4.5 3.6 3.2 2.8 2.3 3.0Debt to Capitalization 26.9% 32.3% 35.1% 35.4% 42.2% 44.8% 49.7% 43.6%

LiquidityCash to Debt 191.2% 167.4% 168.2% 138.5% 110.1% 97.1% 91.7% 88.2%Days Cash on Hand (days) 287.2 275.6 237.3 239.3 178.1 145.9 142.2 128.1

OtherCapital Spending Ratio 158.4% 125.8% 112.2% 126.1% 110.8% 103.1% 86.6% 88.6%Compensation Ratio 52.3% 52.9% 54.3% 55.5% 54.4% 57.8% 56.8% 54.9%

Medians based on Fitch’s Ratios for Nonprofit Hospitals and Healthcare Systems for Fiscal Year 2013 (published in 2014).

44

Fitch’s 2013 Median Ratios

• Fitch reported the 2013 results on August 11, 2014• For the first time in the past 6 years, Fitch Ratings observed a

decline in operating profitability across all rating categories.• Fitch attributes the primary causes driving the decline to be

ongoing softness in volumes coupled with the transition to lower cost services, continued reimbursement pressure and ongoing costs associated with the implementation of the Patient Protection and Affordable Care Act (PPACA).

45

Fitch’s 2013 Median Ratios (continued)

• Balance sheet liquidity metrics further strengthened with key measures including days cash on hand (DCOH), cushion and cash to debt ratios continuing year-over-year improvement. Fitch believes the balance sheet improvements reflect strong investment returns, solid yet reduced profitability levels, vigilant capital/expense management and aggressive revenue cycle management.

• Overall Median Rating Is ‘A’: Since 2003, the median rating in Fitch’s portfolio has migrated upward to ‘A’ from ‘A−’. Furthermore, there has been a significant increase in the percentage of ‘AA−’ rated entities among Fitch’s rated borrowers since 2003. Fitch believes this trend is likely to continue as the sector further consolidates as industry pressures prompt lower-rated credits to affiliate, align or merge with stronger partners.

46

Capital Expenditure Trends

2008 2009 2010 2011 2012 2013100.0%

110.0%

120.0%

130.0%

140.0%

150.0%

160.0%

170.0%

S&PMoody'sFitch

47

Days Cash on Hand Trends

2008 2009 2010 2011 2012 2013 100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

190.0

200.0

S&PMoody'sFitch

48

Fitch Midyear Outlook• Year-to-date rating actions display credit stability within the

sector through the first-half of calendar year 2014. • From January 2014–July 18, 2014, Fitch affirmed 100 ratings,

downgraded 12 and upgraded 10. Over the same period, there were 31 outlook changes: 16 negative and 15 positive.

• Key drivers on negative rating actions or outlook changes primarily reflect the negative impacts related to unexpected inpatient volume declines and an inability to adjust expenses quickly against weaker-than-anticipated revenue.

49

Fitch Midyear Outlook (continued)

• Rating drivers on positive rating actions were more varied; several were driven by realized benefits of strategic affiliations, while others’ were a result of volume growth and more efficient operations.

• While Fitch expects the majority of rating actions in 2014 to be affirmations, downgrades are likely to outpace upgrades. Fitch believes negative rating actions are likely to be more prevalent among borrowers in the ‘BBB’ rating category and below. Expense-control initiatives will likely garner diminishing returns, and increased uncertainty and costs associated with PPACA implementation will make the operating environment increasingly challenging to manage.

50

Fitch Year-To-Date Ratings

90%

8%

2%

YTD Outlooks as of July 2014

StablePositiveNegative

80%

9%

10% 1%

YTD Rating Actions as of July 2014

AffirmedUpgradeDowngradeRating Watch On

51

Fitch Rated Hospitals in MarylandSystem Rating Outlook

Affinity Health Alliance A Stable

Anne Arundel Health System A- Stable

Bon Secours Health Care System A- Stable

Calvert Memorial Hospital A Stable

Carroll Hospital Center BBB+ Stable

Doctors Community Hospital BB+ Stable

Frederick Memorial Hospital. BBB+ Stable

Johns Hopkins Health System AA- Stable

MedStar Health A Stable

University of Maryland Medical System A Stable

Rating as of August 11, 2014

52

Speaker BiographyJane Benjamin, Vice President, Kaufman Hall & Associates, Inc.Provides both strategic and financial planning assistance to hospitals and health systems nationwide. Her experience includes strategic and financial planning, reimbursement, mergers and acquisitions, demand and utilization forecasting, and financial modeling. 

Prior to joining Kaufman Hall, Mrs. Benjamin worked for Ernst & Young in its Health Sciences Advisory Services Group for 19 years and was an adjunct faculty member at Carnegie Mellon University.

Mrs. Benjamin has an M.B.A. and an M.A. in Healthcare Administration from the University of Iowa and is a CPA.

Contact information:Jane BenjaminVice PresidentKaufman, Hall & Associates, Inc.5202 Old Orchard Rd., Suite N700Skokie, Illinois 60077724.327.5770jbenjamin@kaufmanhall.com