Moody's Issues UMass Memorial Health Care Credit Downgrade

Moody's Investor Service has downgraded UMass Memorial Health Care's credit rating in light of deteriorating operating performance and a host of other factors over several years, according to the credit rating agency.

Moody's changed the Worcester-based health care system's rating, on $299 million in debt, from a Baa1 to a Baa3 (equivalent to a BBB+ to a BBB- on the S&P or Fitch scale). Moody's said the lower rating "reflects the sharp decline in operating performance in (fiscal) 2013 that follows a recent history of eroding margins, exacerbated by pronounced and immediate debt structure and covenant issues."

The decline in financial performance "reflects a largely unionized work force, decline in patient volumes, high Medicaid exposure, and growth of expenses," according to Moody's.

UMass Memorial Health Care President and CEO Erik Dickson wrote in a blog post Monday that the system faces an annual cost increase of 4 percent but is only able to grow revenue by half that much. Dickson said UMass will need to close some programs in 2014, which will result in the loss of more jobs.

Last week, it announced 40 layoffs in non-medical roles at UMass Memorial Medical Center in Worcester.

“It is a harsh reality, but the only way that UMass Memorial will survive and thrive in the future is by making these painful changes now,” Dickson wrote.

Dickson said the health care system had an operating loss of $55 million for fiscal 2013, which ended Sept. 30, and wasn’t doing much better in October or November.

Dickson said the system’s operating losses have eaten into long-term cash reserves, which he said must be maintained at a certain level to meet agreements with lenders.

While the credit downgrade reflects UMass Memorial Health Care's financial struggles, a BBB- rating is still considered "investment grade," according to Moody's standards. It signals a business has "acceptable ability to repay short-term debt."

UMass Memorial spokesman Robert Brogna said in an e-mail statement that the health care system is not surprised by the downgrade.

"Over the past few years, UMass Memorial Health Care, not unlike many other health care systems across the country, has seen declines in inpatient volumes and lower revenues for the services provided. The health care industry itself is not being reviewed favorably recently with the implementation of the Affordable Care Act and other federal reimbursement challenges.…We are confident that our operating plan will return UMass Memorial Health Care to a strong, stable condition for the future."

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