BRADENTON, Fla. — Patient losses and market pressure from a 2014 Justice Department settlement factored into a two-notch downgrade for King's Daughters Medical Center in Kentucky.
Moody's Investors Service dropped the ratings on bonds issued for KDMC to Baa2 from Aa3, and maintained a negative outlook on Aug. 6.
The action affects $239 million of Moody's-rated debt issued by the Kentucky Economic Development Finance Authority for the 465-bed hospital in Ashland, which is about 120 miles east-northeast of Lexington.
"The downgrade reflects continued significant volume and revenue declines, driving large and greater-than-expected operating losses in fiscal 2014, and through eight months of fiscal 2015," said analyst Meredith Moore.
Revenue decreased 4% in fiscal 2014, and 5% so far in 2015, contributing to a material revenue decline of 24% since 2011.
"Given revenue challenges and an adverse change in payer mix, we expect operating losses will continue," Moore said.
The rating incorporates substantial cost reductions implemented over the last two years and benefits from reductions in self-pay and bad debt from Kentucky's Medicaid expansion, according to Moody's.
In February 2014, KDMC and the Department of Justice reached a final settlement into an ongoing investigation of the hospital's heart program, requiring the facility to pay $40.9 million to the DOJ and the state.
Though KDMC admitted no wrongdoing, Moody's said the hospital was unable to discuss the case while the investigation was ongoing and resulted in significant reputational damage.
"KDMC continues to pay fees related to the investigation and suffer volume loses due to the length and lingering effects of the case," Moore said.
In 2014, patient volume continued to decline as a result of the DOJ investigation, with admissions dropping 12%. So far in 2015, admissions have been below the prior year by 9%, and outpatient surgeries have declined by 9%.
To boost volume, Moody's said KDMC has implemented a rebranding initiative to improve transparency and community relations. Other efforts include centrally scheduling appointments, opening a retail clinic, and launching a telemedicine program.
In June, Standard & Poor's revised King's Daughters' outlook to stable from negative, and affirmed its BBB ratings on the hospital's 2014, 2010A, 2010B, and 2008C medical center revenue bonds.
