RICHLAND -- Kadlec Regional Medical Center officials said they aren't fazed by a recent downgrade in the Richland hospital's bond rating by Moody's Investor Services.
They instead are focusing on another aspect of the report -- a change in outlook from "negative" to "stable" by the credit rating service.
Moody's in August assigned a rating of "Baa3" to $190 million in bonds issued by Kadlec -- $60 million issued in August to pay for a handful of new projects and $130 million in existing bonds for previous projects.
That's a slight change from the "Baa2" rating assigned to the debt in February, and means the hospital could face an increase in interest rates on repayment of the debt or on bonds issued in the future.
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No ratings were available from Moody's for either Kennewick General Hospital or Lourdes Medical Center in Pasco.
But Rand Wortman, CEO of Kadlec Health System, told the Herald he isn't concerned about the downgrade since Kadlec doesn't plan to issue any more bonds in the near-term future, and got what he considers a good interest rate of 5.07 percent -- including all of the fees and costs associated with the bonds -- on the $60 million issued in August.
"We're very pleased with the interest rate," Wortman said.
Moody's rates the relative credit risks of financial obligations, with the ratings reflecting Moody's opinion on the likelihood of default or the financial loss expected in the event of a default, according to the service's report on its global rating scales.
The service's global long-term rating scale ranges from a high of "Aaa," the debt considered to be of the highest quality and lowest level of credit risk, to C, debt that's typically in default with little prospect of repayment.
The "Baa" rating is applied to debt considered medium-grade and subject to moderate credit risk, and can fall on a scale of 1 to 3 within that rating, with 1 being the highest and 3 the lowest.
So the shift from "Baa2" to "Baa3" means Kadlec's debt slipped from the mid-range of the "Baa" rating to the lower end of debt in that category, according to Moody's definitions.
The downgrade came primarily because of the amount of debt Kadlec is carrying, a reduction in the hospital's operating cash in 2011 because of a significant one-time expense, and cuts to Medicaid reimbursement affecting the hospital, the Aug. 7 rating action report said.
The report noted as strengths Kadlec's four consecutive years of increasing patient volumes, "exceptional revenue growth" over the past few years and the growing regional population that is likely to contribute to future growth.
Moody's also listed as a strength the relative small size of competing hospitals, and that Kadlec serves about 50 percent of the market for hospital services in Benton and Franklin counties.
The report said Kadlec's operating performance improved significantly through the first five months of 2012, leading to the outlook upgrade to "stable."
The negative outlook applied by Moody's in February was the result of the hospital's reduced cash in 2011.
Wortman said Kadlec's bottom line in 2011 was affected by a one-time expense of about $10 million for installation of a new electronic medical records system. The $10 million estimate also included lost patient volume during the transition as employees were spending time learning the new system.
"Now we're past that and experiencing strong profitability," Wortman said.
He said that the debt Kadlec is carrying is paying for new buildings and facilities that will allow Kadlec to move services out of rented space into space that the hospital owns, thereby saving on rent payments and ultimately improving the hospital's long-term financial position.
The $60 million in bonds issued in August are paying for the new neuroscience building, renovation of the old Rite Aid building on Lee Boulevard where Kadlec plans to house its physical therapy service and Diabetes Learning Center, a medical office building on Jadwin that will house part of the Kadlec Clinic primary care physician practice, and the freestanding emergency department being built in Kennewick.
"All four of these make economic sense to use from a service and cash flow perspective," Wortman said. "It is just a good business move."
He said the downgrade in Kadlec's debt rating was no surprise, but was something the hospital board was willing to absorb to build the new facilities.
"We could sit here and accumulate a lot of cash and not invest in our future and probably have better bond ratings, or we could use our cash to expand services and invest in the community and in our future, recognizing that takes cash and can result in a lower bond rating," Wortman said. "We have made the decision over and over to do what's good for the community."