New York, March 20, 2020 -- Moody's Investors Service has downgraded University of Vermont Health Network's (UVMHN) revenue bonds to A3 from A2. The outlook is stable. This action affects about $310 million of rated debt.
RATINGS RATIONALE
The downgrade to A3 from A2 reflects an expectation that UVMHN will continue to face challenges in achieving margins in the 9%-10% range following two years of below budget performance. Underperformance was largely attributed to higher than anticipated physician expenses at several affiliated hospitals, which will take some time to address. Going forward, unexpected billing and collection issues related to the implementation of a new IT system will contribute to still modest margins in fiscal 2020. In addition, beyond fiscal 2019, days cash measures will continue to trend down, contrary to expectations.
The A3 rating reflects UVMHN's ability to capture significant market share in the region, leveraging its presence as the only academic medical center in Vermont. UVMHN's network of hospitals, integrated physician organization, streamlined governance structure and ongoing efforts to unify the system will help it operate under the state's unique risk-based all-payor reimbursement model. Cash to debt will be solid while days cash will remain adequate for the rating category despite moderating trends. Management will find it challenging to improve modest operating cash flow margins, which have come in below budget since fiscal 2018. Importantly, based on management's forecasts, margins will continue to lag prior expectations over the next several years. In order to begin to boost performance, management will focus on reducing expenses largely associated with physicians at several of its affiliated hospitals. UVMHN will also address several unexpected billing issues that emerged in fiscal 2020 as the system installed its IT system. The system's high reliance on net income from the 340B drug program will continue to provide uncertainty given heightened scrutiny on specialty drug pricing. Further, operating performance will be affected by high levels of regulation that will continue to influence payment rates. Despite its broad network, UVMHN will face some uncertainty under the state's risk-based model. While very much an evolving situation, with the system now suspending all elective surgeries, we currently are operating under the assumption that UVMHN will be able to absorb the effects of the coronavirus. Social distancing might be more effective in UVMHN's rural markets. This could result in lower risk of coronavirus spread. However, as the only AMC in the state, UVMMC would likely be where the most critically ill patients would be treated.
RATING OUTLOOK
The stable outlook incorporates our baseline assumptions that we will see some containment of the outbreak in the second half of 2020 and that the economy will gradually recover. Under this scenario, the outlook reflects the expectation that UVMHN will be able to absorb any effects of the outbreak and will gradually raise operating cash flow margins, which will remain moderate and below prior forecasted expectations. The outlook further assumes that cash to debt and days cash measures will not decline beyond current expectations. However, there is a high degree of uncertainty given a rapidly changing situation. Therefore, risk that the outbreak will be prolonged and the economic fallout will be more severe is elevated. Depending on how UVMHN is affected, this could result in further downward pressure on the rating.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Ability to return to and sustain strong operating cash flow margins
- Material growth in unrestricted cash and days cash
- Materially stronger cash to debt, debt to cash flow and coverage measures
- Demonstrated success under new payment models and sustained favorable rate increases
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Unexpected high level of operating disruption associated with coronavirus cases or much more severe downturn in the economy
- Inability to achieve gradual improvement in operating cash flow margins
- Prolonged disruption associated with billing issues stemming from IT implementation
- Deterioration in days cash or cash to debt beyond currently forecasted levels
- Inability to attain higher payment rates as anticipated or effectively manage costs, especially in light of new risk contracts
- Unfavorable changes to 340B drug program or constraints on specialty drug pricing
LEGAL SECURITY
Security is provided by a mortgage pledge on the UVMMC campus property and gross receipts.
PROFILE
UVMHN is a six-hospital network serving Vermont and northern New York. The hospitals include its flagship, the University of Vermont Medical Center (Burlington, VT), as well as Central Vermont Medical Center (Berlin, VT), Champlain Valley Physicians Hospital (Plattsburgh, NY), Elizabethtown Community Hospital (Elizabethtown, NY), Alice Hyde Medical Center (Malone, NY), Porter Medical Center (Middlebury, VT), and the UVM Health Network Home Health & Hospice. The network also includes the UVM Health Network Medical Group. UVMHN was formerly known as Fletcher Allen Partners. The name was changed in 2014 to reflect the strategic affiliation with the University of Vermont and State Agricultural College (Aa3 stable).
METHODOLOGY
The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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Diana Lee
Lead Analyst
PF Healthcare
Moody's Investors Service, Inc.
7 World Trade Center
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New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Lisa Martin
Additional Contact
PF Healthcare
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
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