DALLAS – In an era of challenges for public healthcare, the Harris County Hospital District earned a two-notch Fitch Ratings upgrade despite weakness in the Houston area's energy economy.
The upgrade to AA came ahead of this week's issue of $60.7 million of certificates of obligation to finance an additional seven operating rooms at Ben Taub Hospital, the Houston area's major safety-net hospital.
"The AA issuer default rating and revenue bond ratings reflect the strength of the HCHD's expansive tax base, significant taxing margin to support both operations and debt service, as well as the operating security of its position as the safety net provider for Harris County," Fitch analyst Emily Wadhwani wrote.
"With expected revenue pressure from reductions in Medicaid supplemental funding, HCHD will need to continue its work on operating efficiency and perhaps increase its tax revenues in order to maintain its financial profile," Wadhwani wrote. "Unexpected erosion in HCHD's financial profile could pressure the rating."
In affirming its Aa1 rating, Moody's Investors Service cited the same strengths, along with a low debt burden and pension obligations.
"Additional considerations include the local economy's exposure to the prolonged decrease in oil prices, the system's limited ability to grow revenues by expanding patient services and wide fluctuations in cash balances throughout the year," Moody's analyst Adebola Kushimo said.
The fifth-largest metropolitan health system in the country has three hospitals. Ben Taub General Hospital is the largest with 492 beds, followed by Lyndon B. Johnson Hospital with 235 beds, and Quentin Mease Hospital with 49. The district also has18 community care centers, six school-based clinics, and other ambulatory sites.
The district also has a foundation and a Medicaid health maintenance organization, Community Health Choice.
The certificates will price Tuesday through negotiation with book runner JPMorgan and co-managers Bank of America Merrill Lynch & Co. and Ramirez & Co.
First Southwest Co. is financial advisor with Norton Rose Fulbright as bond counsel.
With the upcoming issue, HCHD's total debt will be approximately $336 million, of which $104 million is series 2010 variable-rate demand bonds. Maximum annual debt service will decline from $24.4 million in 2018 to $18.8 million in 2042, according to Fitch.
A letter of credit by JPMorgan Chase supports the variable rate debt through Aug. 12, 2017. The district is also counterparty to a $103.5 million notional swap, which had a negative $19 million fair value at Feb. 28, 2016, Fitch said.
"Pro forma debt to capitalization is a low 36.3% and pro forma maximum annual debt service was a low 1.1% of fiscal 2016 revenues," Wadhwani wrote. "Further, capital needs are diminishing to near 110% of annual depreciation and are expected to be funded via cash flow and philanthropy rather than debt over the medium term."
The majority of the district's revenue comes from sources largely outside its control, including property taxes, Medicaid, and other programs, Kushimo wrote. That exposes the system to changes in funding levels and programmatic priorities from the state and federal government.
HCHD and other hospitals throughout Texas dodged a bullet earlier this year when the state gained a 15-month extension of a Medicaid waiver that was set to expire in September.
The waiver was needed because Texas refused to expand Medicaid eligibility under the Affordable Care Act. Like most other states with Republican governors, Texas has challenged the so-called Obamacare legislation in court and refused to accept federal funds to cover treatment for the working poor.
Federal Medicaid officials' approval of Texas' waiver in 2011 was based on the assumption that Medicaid expansion would happen in all 50 states. The 2012 U.S. Supreme Court ruling known as NFIB v. Sibelius gave states the option not to expand Medicaid. Texas is one of 19 states that declined the expansion.
The federal Centers for Medicare and Medicaid Services have given Texas officials until December 2017 to come up with a more economical plan, or it will begin phasing out the $5.5 billion a year that allows safety-net hospitals to survive.
Harris County hospitals would lose $494 million in 2018, with neighboring Fort Bend County losing $23 million and Montgomery County losing $14 million, according to the Center for Public Policy Priorities, an advocacy group for the poor.
"In 2018 alone, Texas stands to lose about $1.3 billion in federal health care funding without a major waiver remodel that includes a coverage plan for working poor adults," the center said in a July 14 report.
Texas has the largest number of uninsured citizens of any state. About 1.5 million uninsured Texans don't qualify for Medicaid but don't make enough to qualify for subsidies under Obamacare. When those people need medical care, they must go to safety-net hospitals, which have access to a special stream of federal funding called an 1115 Waiver.
The Harris County Hospital District, like those in other large Texas cities, is also supported by property taxes.
The district's $379.6 billion tax base is large and continues to grow, despite the downturn in the energy sector, analysts wrote. Harris County is the third largest county by population in the U.S., and encompasses most of the city of Houston, which serves as the world capital for oil and gas corporations.
"Continued projects particularly from non energy sectors including transportation (port), healthcare, tourism, and the petrochemical industry have resulted in assessed valuation growth that have averaged 7.3% annually over the past five years, increasing 11.7% in fiscal 2016 over the prior year," Kushimo wrote.
However, the recent and prolonged decrease in gas prices has had a negative impact on the local economy.
"Although overall growth is continuing, the pace has softened significantly, evident by preliminary indications of a 5% increase in assessed values for fiscal 2017," Kushimo said. "Big gains in nonresidential construction are expected to prevent a recession but low prices will constrain the metropolitan area in 2016."
Last November, Harris County Commissioners approved $70 million for upgrades to protect the Level 1 status of Ben Taub Hospital's trauma center. The hospital was given one year to develop a plan to maintain its accreditation after the American College of Surgeons found deficiencies during an inspection in 2014.
Proceeds from this week's deal will pay for expanded operating room capacity and other improvements.
The Harris County Commissioners Court voted unanimously in favor of construction debt to cover the improvements.
