S&P lowers UMass Memorial outlook

File photo UMass Memorial Health Care's credit rating outlook was lowered Friday from stable to negative by Standard & Poor's Rating Services following weaker-than-expected second quarter earnings.

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UMass Memorial Health Care’s (UMMHC) credit rating outlook was lowered Friday from stable to negative by Standard & Poor’s Rating Services following weaker-than-expected quarterly earnings.

“The negative outlook reflects rating risk associated with UMass Memorial’s slower-than-expected turnaround relative to both earnings and accumulation of unrestricted reserves as well as added pressure from volumes that are below budget in fiscal 2014 year to date,” S&P credit analyst Cynthia Keller said in a statement.

S&P said the negative outlook reflects primarily a $16.47 million year-to-date operating loss, as well as some uncertainty about UMMHC’s ability to improve or sustain earnings during a challenging time in the industry. S&P, however, kept a BBB+ rating on the medical center’s $288 million in debt.

“The decisions and hard work of the past year have moved the organization in the right direction,” said Sergio Melgar, UMass Memorial chief financial officer, in a statement. “The comments by S&P make it clear that we still have work to do in this challenging health care environment if we are to maintain or improve upon our rating in the future.”

To maintain its current rating, S&P said UMMHC must post break-even operating results in 2014 and move into a sustainable operating surplus. The rating agency said it also wants to see progress toward strategic goals such as increased regional integration, a stronger relationship with University of Massachustts Medical School, and preparations to transition away from a fee-for-service model.

S&P noted that management’s effort to contain expenses through layoffs and flexing the workforce in response to patient demand appear to be gaining traction, with UMMHC posting an operating profit in April. The health care system cut 388 full-time equivalent positions between October and the end of April.

S&P also said UMMHC is bolstered by its position as the only provider of tertiary care in Central Massachusetts, as well its ownership of community hospitals in Clinton, Leominster and Marlborough.

The S&P action follows credit downgrades by Moody’s Investors Service, which dropped its rating from Baa1 to Ba1 (equivalent to a BBB+ to a BB+ on the S&P scale). Melgar said last week the Moody’s downgrade to “speculative” investment status has been particularly challenging for the system.