Fitch: Providence Health System Ratings Unaffected by Class-Action Lawsuit Settlement

Business Wire, Nov 29, 2005

SAN FRANCISCO -- Providence Health System (Providence) recently settled a class-action lawsuit alleging that Providence participated in unfair billing practices by charging uninsured patients higher rates than those charged to patients with private insurance. Fitch recently spoke with Providence's management team to discuss the settlement. Providence estimates the worst-case impact of the retroactive discount to be an approximately $1.0 million-$4.5 million reduction in net income in 2005, an amount Fitch considers to be immaterial given Providence's operating history and financial flexibility. Providence did not acknowledge any wrongdoing and settled largely to avoid substantial legal costs.

As part of the settlement, Providence is offering any uninsured patient charged for care at any one of Providence's seven hospitals in Oregon in the past four years a retroactive reduction in the bill equal to a preferred provider rate. This would equate to an 11%-32% discount depending on delivery area. In addition, Providence will offer prospective discounts based on a sliding scale to patients whose household income is 201%-400% above the poverty level and free care to patients whose income is less than 200% above the poverty level for the next two years. Fitch considers the potential negative financial impact of the retroactive discount to be relatively immaterial, as most hospitals typically collect only a very small portion of uninsured patients' bills. A sizable future increase in charity care could be more problematic, although Fitch does not expect any potential effect from the settlement to have a negative impact on Providence's credit rating. The settlement applies only to Providence's Oregon-based hospitals. There currently are no other class-action lawsuits pending against Providence hospitals located in other regions, and Providence has implemented similar prospective discounts across the system.

A large influx of uninsured patients eligible to receive deep discounts or free care under the settlement guidelines could further impact profitability; however, management stated that the discounts outlined under the settlement have been in effect since the start of calendar-year 2005 with little to no impact on profitability. Through the nine months ended Sept. 30, 2005, Providence achieved a $182.8 million operating income, which was well ahead of the $148.2 million operating income through the same period in the prior year. Overall, Fitch views the settlement as having a negligible impact to Providence's financial profile.

Fitch rates Providence's outstanding bonds (listed below) 'AA' with a Stable Rating Outlook. For more information on Providence's credit rating, see 'Providence Health System, Washington,' dated July 8, 2005, available on the Fitch web site at www.fitchratings.com.

Headquartered in Seattle, Washington, Providence is a fully integrated health care system with 18 acute-care hospitals, 12 long-term care facilities, one health plan, and other related entities located throughout Washington, Oregon, Alaska, and California. In 2004, Providence reported total operating revenues of $4.0 billion. Providence covenants to provide bondholders with quarterly financial disclosure, which Fitch views positively. Management's financial and material events disclosure to Fitch for surveillance purposes has been good and includes some utilization statistics but lacks cash flow statements. Annual and quarterly financial statements are posted on Providence's web site at www.providence.org, which Fitch views favorably.

Outstanding issues:

--$60,000,000 Providence Health System Obligated Group direct obligation notes, series 2005

--$100,000,000 Hospital Facilities Authority of Multnomah County, Oregon, revenue bonds, series 2004 (Providence Health System);

--$20,495,000 Alaska Industrial Development and Export Authority, revenue bonds, series 2003C (Providence Health System);

--$213,475,000 Hospital Facility Authority of Clackamas County, Oregon, revenue bonds, series 2003D-G (Providence Health System);

--$36,000,000 Alaska Industrial Development and Export Authority, revenue bonds, series 2003H (Providence Health System);

--$105,200,000 Washington Health Care Facilities Authority, revenue bonds, series 2001A (Providence Health System) (1);

--$46,150,000 Washington Health Care Facilities Authority, revenue bonds, series 2001B (Providence Health System) (1);

--$157,400,000 California Health Facilities Financing Authority, insured variable-rate revenue bonds, series 2001A-C (Providence Health System) (1);

--$10,380,000 Washington Health Care Facilities Authority, revenue bonds, series 1999 (Sisters of Providence);

--$19,600,000 Sisters of Providence Obligated Group, taxable insured variable-rate demand bonds, series 1999A (2);

--$66,135,000 California Health Facilities Financing Authority, health facility revenue bonds series 1998 (Little Company of Mary Health Services);

--$25,890,000 Sisters of Providence Obligated Group, direct obligation notes, series 1997;