Fitch Affirms Geisinger Rating at 'AA-/F1+'; Outlook Stable

Business Wire, Dec 20, 2005

NEW YORK -- Fitch Ratings affirms the 'AA-/F1 ' rating on the approximately $319.9 million of Geisinger Health System's (GHS) (Montour County, PA) health system revenue bonds. The Geisinger series 2005B-C bonds carry a short-term rating of 'F1 ' based on a liquidity facility provided by Wachovia Bank, National Association. The series 2002 bonds carry a short-term rating of 'F1 ', based on a liquidity facility provided by Fleet National Bank, a Bank of America company. The series 2000 bonds were refunded by the series 2005B-C bonds on Oct. 5, 2005. The series 2005A bonds carry a short-term rating of 'F1 ' based upon self liquidity provided by GHS. The Rating Outlook is Stable.

GHS' long-term rating is supported by a strong balance sheet, low debt burden, leading market share in central and northeastern Pennsylvania bolstered by a strong integrated delivery network, and continued operational improvements. GHS' cash to debt remains strong at 239.6% and 190.9 days' cash at Sept. 30, 2005. Fitch believes GHS' integrated delivery system gives the system a competitive advantage in its service area, which allows GHS the ability to implement evidenced-based medicine. GMC's market share grew to 42% in its primary service area in fiscal 2005. GHS has implemented several strategies to enhance operational performance over the past few years and expects further improvement from continued growth in high acuity service lines and continued operational improvements in the health plans through strict underwriting and product diversification.

GHS' short-term rating is also supported by its strong balance sheet as well as the organizations ability to provide funds on a timely basis in the unlikely event of an unremarketed put. At fiscal year-end 2005, GHS had approximately $234.2 million in highly liquid instruments, including cash, bank deposits, money market funds, and U.S. government and agency obligations, all of which are accessible on a same-day basis and would cover GHS' putable debt by 3.6 times (x). For more information on the basis for the 'F1 ' rating, see Fitch's report on GHS, dated July 5, 2005.

Operating margins in fiscal 2005 improved to 2.8% ($39.5 million) from 0.3% ($4.1 million) in fiscal 2004. GHS' excess margin in 2005 improved significantly to 3.9%, from 2.5% in fiscal 2004. Through the first three months of fiscal 2006, GHS posted a 2.4% operating margin. Coverage of maximum annual debt service (MADS) and MADS as a percentage of revenue was 7.3x and 1.1% through the first three months ended Sept. 30, 2005, indicating a low debt burden.

Credit concerns include low historical operating profitability, the possibility of future revenue constraints in the health plan, the challenge of integrating the new facility, and a weak legal structure governing the bonds. GHS' profitability, while improving, remains below Fitch's 2004 'AA' median of 3.2%. Medicare Advantage members accounted for approximately 16% of Geisinger Health Plan's total members at June 30, 2005, up from 14.4% at June 30, 2004. Fitch remains concerned that GHP is susceptible to possible federal cutbacks in Medicare premiums. Additionally, Fitch believes the rate of premium growth for commercial contracts going forward could be lower than in recent years. GHS acquired most of the assets of Mercy Hospital in Wilkes-Barre, PA, from Catholic Healthcare Partners (rated 'AA-' by Fitch) on Dec. 1, 2005. While the terms of the transaction are expected to have a minimal impact on GHS' balance sheet, the integration of the hospital into GHS' system could be challenging. GHS' outstanding debt is unsecured, with no security interest in real or personal property of GHS and its affiliates, Additionally, legal covenants are fairly weak providing minimal bondholder protection.

The Stable Rating Outlook reflects Fitch's belief that GHS has established a strategy in its markets through its integrated delivery model that should allow sustained profitability at current levels. While GHS does not provide a forward-looking statement to Fitch, management has indicated that it expects year-over-year improvement of 0.5%. GHS does not expect to issue debt over the near term, which coupled with GHS' moderate capital needs should lead to preservation or improvement of balance sheet indicators. GHS is composed of the Geisinger Medical Center in Danville (364 licensed beds), Geisinger Wyoming Valley Medical Center in Wilkes-Barre (161 licensed beds), Geisinger South Wilkes-Barre in Wilkes-Barre (191 licensed beds), Marworth alcohol and dependency treatment center in Waverly, the Geisinger Health Plan (with approximately 211,000 covered lives), and 56 multispecialty group practices employing approximately 665 physicians, serving 41 counties in Pennsylvania. GHS covenants only to provide annual financial information to bondholders and no quarterly disclosure, which Fitch views negatively. However, GHS voluntarily provides thorough and timely quarterly disclosure to investors through the NRMSIRs, which includes balance sheet, income statement, cash flows, utilization statistics, and management discussion and analysis.