S&P gives Integris tempered outlook

Integris Health management has implemented several changes to achieve an economic rebound this year, according to a report by the New York bond evaluation firm Standard & Poor's.

Those remedial efforts include eliminating 250 full-time equivalents at rural hospitals, physician compensation cuts, termination of a hospital lease and "the sales of an athletic training facility and medical equipment joint ventures," the report said Monday.

Integris owns Pacer Fitness Center, a pioneer in the field, and has an interest in The Adams Course Health and Sports Performance Institute. S&P noted HealthCare Oklahoma -- the health-maintenance organization of WellCor America, a joint venture involving Integris - - was unprofitable in 1998 and `99, but is expected to break-even in 2000 "as result of significant pricing increases." The report said Integris cost reductions, the addition of new leased and owned facilities, ambulatory care and other service expansions, and operational improvements are expected to mitigate the further impact of Medicare reimbursement cuts. The report came as S&P affirmed its A+/A-1+c rating Monday on the Oklahoma Industries Authority's $75 million flexible rate hospital revenue bonds and $105 million flexible rate hospital revenue bonds series 1995A, issued for Integris Baptist Medical Center and members of the Integris Health Obligated Group. The S&P outlook, however, was changed to negative. The firm noted Integris plans $235 million in capital spending for the next three years. That, it said, would limit management's ability to accumulate capital. These plans include the construction of a new 40-bed primary care referral hospital in Yukon, about 30 miles west of Integris Baptist, which could pressure earnings in fiscal 2001 and 2002. S&P warned the Integris system's financial profile and credit quality could be hurt if earnings do not rebound as expected to generate sufficient cash flow to cover most of the system's capital requirements. S&P's long-term rating was affirmed based on Integris Health's strong business position, "substantial liquidity and management's proactive efforts to capitalize on profitable hospital operations and improve the system's overall financial results." S&P profiled Integris, the state's largest health system, as holding "a very strong business position," with a geographically dispersed network of 1,800 physicians and 15 owned and leased health facilities offering 1,600 beds. Integris' Baptist Medical Center, which S&P called the system's profitable 524-bed tertiary flagship facility, and Southwest Medical Center, with 432 beds, capture 24 percent of Oklahoma City's inpatient health care market. Its seven health facilities in the obligated group generate more than 50,000 discharges per year and 320,000 ambulatory visits. Integris' liquidity is very strong, said S&P, with $356 million of cash and investments, net of $17 million of proceeds from the sale of accounts receivable -- the equivalent to 93 percent of total outstanding debt. It maintains more than $220 million of reserves in a limited duration fund, with 90 percent invested in short-duration, fixed-income securities. The fund was set up to hedge high variable rate debt ($227 million of $381 million outstanding debt) and mitigates cash flow pressures and high 56 percent overall debt leverage. S&P noted the system's important hospital businesses rebounded from a thin deficit in 1996, with expectations of an operating income topping $20 million operating income in fiscal 1999. That would follow trends over the past two years, it added, offsetting $20 million of annual losses generated by acquired primary care physician practices, recently acquired non-strategic businesses and a sharp drop in home health volume and Medicare balanced budget cuts. Fiscal 1999 will be Integris' third consecutive year the consolidated system posted an operating margin of less than 1 percent and a net margin in the 2-4 percent range. The A-1+ short-term rating component is based on a liquidity facility from Morgan Guaranty Trust. The `c' subscript indicates the liquidity facility would automatically terminate if the bonds are deemed taxable or the system's long-term rating is reduced below BBB- . If reimbursement or competitive pressures constrain Integris' improved operating results, or if its balance sheet is "materially diluted" by capital spending and funding plans, S&P said its rating could fall within the next two years.

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