Fitch Affirms Tufts Medical Center, MA's Revs at 'BBB'; Outlook Stable
CHICAGO -- February 28, 2013
Fitch Ratings has affirmed the 'BBB' rating on following bonds issued on
behalf of Tufts Medical Center (Tufts MC):
--$209.9 million Massachusetts Development Finance Authority revenue bonds
series I (2011)
The Rating Outlook is Stable.
A lien on and security interest in the gross receivables of the Obligated
Group, a mortgage interest in certain property and a debt service reserve
KEY RATING DRIVERS
SOLID MARKET STRATEGY: Fitch views Tufts MC's 'Distributed Academic Medical
Center'TM model positively. The strategy has helped Tufts MC grow complex
surgical volumes, expand its catchment area and strengthen alignment with
community based physicians and providers.
CONSISTENT OPERATING RESULTS: Fiscal 2012 (year ending Sept 30) operating
results for Tufts MC were consistent with prior year results with a 2.0%
operating margin and a 5.9% operating EBITDA margin compared to 2.6% and 6.1%
operating and operating EBITDA margins in FY 2011. Performance has improved
from much weaker results in prior years.
GROWING LIQUIDITY POSITION: At Dec. 31, 2012 Tufts MC's unrestricted cash and
investments totaled $229.6 million which is a 16.5% increase since Sept 30th
and a 43.3% increase from FYE 2011. As a result, Tufts MC's liquidity metrics
(days cash on hand of 100.4, cushion ratio of 13.3x and cash to debt of
109.4%) have grown significantly from 73.2 days, 9.3x cushion ratio and 75.4%
cash to debt in FY 2011.
MANAGEABLE DEBT BURDEN: MADS equated to 2.0% of fiscal 2012 revenues which is
modest compared to the 'BBB' category median of 3.3%. Coverage of MADS by
EBITDA of 2.9x and 3.1x in fiscal 2012 and 2011, respectively is adequate and
expected to remain consistent due to continued solid operating performance.
MAINTENANCE OF PROFITABILITY: Tufts MC's financial performance has improved
over the last two fiscal years and solid operating performance and debt
service coverage are expected to be maintained.
GROWTH IN LIQUIDITY: Further growth in liquidity metrics combined with stable
and consistent operating earnings could result in positive rating action.
The affirmation of the 'BBB' rating reflects Tufts MC's stable operating
results in fiscal 2012, further improvement in liquidity metrics, a low debt
burden and continued execution of its alignment strategy with community based
providers and physicians.
Tufts MC continues to execute on its 'Distributed Academic Medical Center'TM
model which aims to bring complex inpatient cases to Tufts MC from across the
region through alignment with community based providers and physicians in
eastern Massachusetts, while leaving the primary care cases for the local
communities. Tufts MC has been recognized for providing high quality
tertiary/quaternary clinical care at a lower cost compared to its competitors
and both Tufts MC and New England Quality Care Alliance (NEQCA) physicians
participate in the Blue Cross Blue Shield Alternative Quality Contract which
provides financial incentives for delivery of cost effective medical care
relative to national measures for outcomes and cost. The strategy has helped
Tufts MC grow complex surgical volumes and expand its catchment area and
strengthen alignment with community based physicians and providers. As a
result, Tufts MC increased inpatient (admissions and observation stays) and
surgical volumes in fiscal 2012 from the prior year.
In 2012, Tufts MC and Vanguard Health Systems announced they have entered into
negotiations to develop various care delivery structures and services to
address the changing delivery of care in the areas of chronic conditions,
population health management and direct employer services. Further, Tufts MC
and Vanguard sponsored the application to the Centers for Medicare and
Medicaid Services (CMS) to create the Minuteman Health Initiative, an
independent not-for-profit mutual health insurance plan. CMS granted the
application and extended an $88.5 million loan to capitalize Minuteman Health.
Upon receiving the necessary approval from the Massachusetts Division of
Insurance, Minuteman Health would begin insuring members no later than January
2014, as required by CMS. As a mutual insurance company, Tufts MC has no
financial obligation to Minuteman, to pay its debt nor will Minuteman be
consolidated into Tufts MC's financial statements. Fitch believes Tufts MC's
recent initiatives are important to position the organization for full
implementation of health care reform and the movement towards population
In fiscal 2012, Tufts MC produced $16.8 million of income from operations on
total revenues of $860 million (2.0% operating margin) compared to prior year
income from operations of $21.7 million on total revenues of $841.8 million
(2.6% operating margin). Operating EBITDA of $50.4 million (5.9% margin) in
2012 is consistent with the $51.6 operating EBITDA (6.1% margin) generated in
fiscal 2011. Lower reimbursement from Medicaid payors offset stable inpatient
volumes and an improvement in case mix and surgical volumes. This trend is
much improved from fiscal 2010 and 2009 with 0.3% and negative 0.3% operating
For first quarter of fiscal 2013, Tufts MC has reported a 0.5% operating
margin, and management has implemented initiatives to meet its fiscal 2013
budget of 1.5% operating margin. Fitch believes this is attainable as Tufts MC
was showing a negative 0.3% operating margin through the first quarter of 2012
and ended the year with a 2% operating margin.
Tufts MC benefits from a modest debt burden. In fiscal 2012, MADS equated to a
light 2.0% of total revenues when compared to the 'BBB' category median of
3.3%. Coverage of MADS by EBITDA of 2.9x and 3.1x in fiscal 2012 and 2011,
respectively, is adequate.
At Dec. 31, 2012 Tufts MC's unrestricted cash and investments totaled $229.6
million which is a 16.5% increase since Sept 30th and a 43.3% increase from
FYE 2011. As a result, Tufts MC's liquidity metrics (days cash on hand of
100.4, cushion ratio of 13.3x and cash to debt of 109.4%) have improved and
only the days cash on hand metric compares unfavorably to the 'BBB' category
medians. The Stable Outlook reflects Fitch's expectation that Tufts will
maintain its profitability and debt service coverage over the near term.
Further growth in liquidity metrics combined with stable and consistent
operating earnings could result in positive rating movement.
Tufts Medical Center is a 415 licensed bed academic medical center located in
downtown Boston adjacent to the Tufts University School of Medicine. In fiscal
2012, Tufts MC reported $860.0 million of total revenues. As part of its
continuing disclosure agreement, Tufts MC covenants to provide annual audited
financial statements within 120 days of each fiscal year-end and unaudited
quarterly statement within 60 days of each fiscal quarter-end to bondholders.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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Jim LeBuhn, +1 312-368-2059
Fitch Ratings, Inc.
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