Fitch: Consolidation Amidst Continued Industry Challenges for U.S. Hospitals

The for-profit U.S. hospital industry continues to face challenges from weak volumes, high levels of bad debt and uncompensated care, according to the Fitch Ratings special report ‘For-Profit Hospital Industry Quarterly Diagnosis – First-Quarter 2007.’ In addition, consolidation and recapitalization in the sector led to issuer-specific ratings actions.

First quarter-2007 (1Q’07) was one of the most eventful recent quarters from a credit perspective as Fitch took ratings actions on five of seven issuers rated in the sector as a result of key events and issuer-specific trends. Aggregate credit statistics for the industry weakened in the first quarter, as issuers increased debt to fund acquisitions, dividends, and growth spending. These trends emerged in spite of continued industry challenges including weak volumes and high levels of bad debt and uncompensated care.

One of the most significant events that occurred during the quarter was Community Health Systems’ (Community) announced acquisition of Triad Hospitals Inc. (Triad) for $6.8 billion, including the assumption of $1.7 billion in existing debt. This acquisition was a superior competing bid to a proposed leveraged buy-out (LBO) of Triad by CCMP Capital Advisors and Goldman Sachs Capital Partners for approximately $6.4 billion, including debt, which was also announced during 1Q’07. Fitch placed both Triad and Community on Rating Watch Negative during 1Q’07, and the acquisition could result in a multiple-notch downgrade. The quarterly report presents Fitch’s perspective on this and other key events during the quarter, including Health Management Associates’ debt-financed recapitalization and dividend.

Fitch’s quarterly report also outlines the continued challenges impacting the for-profit hospital industry. Volumes remained weak during 1Q’07, with same store admissions growth at less than 1%. However, Fitch notes that volume growth was not homogenous across the sector. Universal Health Services (UHS) experienced unusually high growth, with same store admissions growth of almost 5% for its acute care facilities. In contrast, HCA Inc. (HCA) and Tenet Healthcare Corp. both saw declines versus 1Q’06, with both same store admissions and same store adjusted admissions less than prior year. Fitch believes the expiration of HCA’s contract with Sierra Health Services led to some shift in market share in Las Vegas from HCA to UHS, but notes that this does not completely explain the disparity in volume growth between the two companies.

In addition to low volume growth, the industry continues to face pressure from rising bad debt and uncompensated care. Although bad debt expense declined from the 4Q’06, Fitch notes there were over $200 million in special charges related to bad debt in the fourth quarter and that bad debt is up versus 1Q’06. Nonetheless, Fitch does see a moderation in the trend of rising bad debt and uncompensated care and expects this to continue in 2007. However, Fitch does not expect a significant reduction in uncompensated care to occur until meaningful legislative reform is enacted at the national level or in those states with the largest uninsured populations.

Additional trend discussions, financial comparisons, and operating metrics are available for each issuer and in aggregate in Fitch’s ‘For-Profit Hospital Industry Quarterly Diagnosis: First Quarter, 2007′ special report. Volumes, pricing, capital expenditures, inpatient vs. outpatient, and other metrics are provided as well as comparisons of rural versus urban operators. In addition, Fitch discusses the 2008 inpatient prospective payment system (IPPS) and President Bush’s proposal for the uninsured.

The full report is available on the Fitch Ratings web site at www.fitchratings.com.