OREANDA-NEWS. February 16, 2016. Fitch Ratings has affirmed the 'BB' rating on the following revenue bonds issued on behalf of Marietta Area Health Care d/b/a Memorial Health System, Ohio (the system) bonds:

--\\$60,000,000 Southeastern Ohio Port Authority Hospital facilities improvement revenue bonds, (Memorial Health System Obligated Group Project) series 2015;

--\\$138,935,000 Southeastern Ohio Port Authority Hospital facilities revenue refunding and improvement bonds, (Memorial Health System Obligated Group Project) series 2012.

The Rating Outlook is Stable.

SECURITY

The series 2012 and series 2015 bonds are secured by general revenues of the obligated group, a mortgage on certain system facilities and debt service reserve funds.

KEY RATING DRIVERS

SIGNIFICANT VOLUME GAINS: Memorial Health System's (MHS) expanded its patient base at a remarkable pace in fiscal 2015 (Sept. 30 year-end), primarily by capturing new business from the West Virginia market at its emergency department in Belpre. Acute admissions in 2015 grew 24.7% to 12,214 from 9,789 in 2014, ER visits grew 35.3% to 74,696 from 55,224, inpatient surgeries increased 24.7% and outpatient surgeries increased 11.0% in 2015.

IMPROVED OPERATING PROFITABILITY: MHS' operating results in fiscal 2015 received a significant boost from improved utilization. Revenue growth of 21.9% during the year helped spur an increase in operating margin to 3.9% and an EBITDA margin of 11.2% from 0.4% and 8.6%, respectively, in 2014.

WEAK AND VOLATILE LIQUIDITY: Despite cash flow improvement and the sale proceeds from a senior living divestiture that improved liquidity in 2015, cash reserves remain thin at MHS. The system had an adequate \\$90.7 million in unrestricted cash at fiscal year-end, equating to 92.5 days cash on hand (DCOH) but dropped to \\$66.9 million (69.5 days) as of Dec. 31, partly as a result of paying back a line of credit that was drawn at year-end and an uptick in accounts receivables. Liquidity fluctuations and volatile cash levels are the primary driver of the non-investment grade rating.

CHALLENGES MANAGING REVENUE CYCLE: Management continues to address the inefficiencies in revenue cycle management that has been reflected in higher than expected days in accounts receivable (A/R). After changing vendors in 2015, MMH is currently working through a backlog in collections. A/R days as of Dec. 31 was 96.2 days, up from 74.9 days at fiscal year-end 2015.

RATING SENSITIVITIES

SUSTAINABILITY OF CURRENT OPERATING PERFORMANCE: With the expansion of its patient base and operating profile, MHS has the opportunity to generate continued healthy cash flow and grow its cash reserves. If the operating results in 2015 and first quarter of 2016 are sustainable, there may be future positive rating momentum.

IMPLEMENTATION OF IT UPGRADE: MHS will go live with a full system upgrade of its information system in May. A successful implementation of the IT system should yield benefits in the long-run, but short-term disruptions to the already stressed revenue cycle process are a credit concern. Any significant disruption to timely receipt of revenue could put pressure on liquidity and would be viewed unfavorably.

CREDIT PROFILE

Marietta Area Health Care, Inc. (d/b/a Memorial Health System) operates the 199-bed Marietta Memorial Hospital (MMH) and a 25-bed critical access hospital, Selby General Hospital (SGH), as well as nine outpatient care centers and 26 medical staff offices and clinical care delivery locations in southeast, OH.

Located in Marietta, OH, the system delivers services primarily in Washington County (OH) and Wood County (WV). The obligated group includes employed physicians and the foundation and accounted for 99.3% of the total net revenues of the system and 99.7% of the total assets of the system in fiscal 2015.

GROWTH STRATEGIES YIELDING OPERATING IMPROVEMENT

MHS' ability to maximize its new free-standing emergency department and ambulatory presence at its Belpre campus elevated the system's revenue and operating profile in 2015. Since opening this site across the Ohio River from Parkersburg, WV, in August 2014, MHS has been significantly growing its inpatient and outpatient business by capturing new market share from the West Virginia market. The resulting business expansion is reflected in a 21.8% increase in net patient revenue for 2015 and 13.1% increase in the three month interim period ending Dec. 31, 2015. Fitch expects that the strong start to fiscal 2016 will carry through the rest of the year.

The 2014 opening of the Belpre campus coincided with the 2014 closing of the ER at St. Joseph's in Parkersburg, when that emergency department was consolidated into the ER of West Virginia University Medicine's Camden Clark Medical Center in Parkersburg. MHS was able to benefit from the market dislocation that resulted from the consolidation. Camden Clark Medical Center has now begun its own \\$20 million ER expansion in July 2015. However, MHS is continuing to take advantage of the disruption from the construction on that campus, as well as leveraging its own employed physician model to continue to capture new patient volumes. The project at Camden Clark Medical Center is expected to be completed by the end of calendar 2016. While Fitch expects volume to stabilize at MHS when Camden Clark's ER expansion is complete, MHS should be able to retain a sizable portion of the patient volume that it garnered since the end of 2014.

MHS' strategic expansion of its employed physician and clinical staff base has also contributed to its patient growth and service expansion, particularly in certain specialties. MHS is continuing to enhance its orthopedic line and is acquiring a new practice from the Parkersburg area which will increase orthopedic surgeries at the system. MHS considers its integration and partnership with its employed clinical staff to be part of its organizational strength and flexibility. The number of employed physicians at year-end 2015 numbered 162, an increase from 147 in 2014 and 114 in 2013.

The increased revenue from utilization growth and an improved payor mix (self-pay had decreased to 2.7% of gross revenues by 2015 with the expansion of the Medicaid program) allowed MHS to improve its operating margin to 3.9% operating margin in 2015 from 0.4% in 2014. EBITDA of \\$44.1 million produced a strong EBITDA margin of 11.2% and covered maximum annual debt service (MADS) by 2.9x, above the metrics for the non-investment grade rating category. Operating margin for the three-month interim period that ended Dec. 31 remained high at 4.7%.

WEAK AND FLUCTUATING LIQUIDITY

MHS fell short of its unrestricted cash goals of \\$103 million by fiscal year end 2015, although liquidity did increase to \\$90.7 million (92.5 DCOH) from \\$69.3 million (76.9 DCOH) in 2014, aided by the \\$10.4 million sale proceed from the senior living divestiture. However, as in prior years, liquidity decreased subsequent to the fiscal year end as MHS paid back a \\$5.0 million short line of credit that is typically drawn at the end of the year. Without the line of credit, DCOH would have measured at 87.4 days in 2015 and 76.9 days in 2014. Cash also fluctuated in the first quarter of fiscal 2016 after payment to vendors and a sizable increase in accounts receivable to 96.2 days as of Dec. 31 from an already high 74.9 days at fiscal end 2015. In an effort to improve revenue cycle, management had changed vendors in 2015, which instead resulted in further revenue cycle disruptions. MHS is currently working through a backlog of receivables which it expects to resolve by March. Consequently, unrestricted cash decreased by \\$23.8 million to 69.5 days in the first quarter of fiscal 2016.

MHS' higher level of receivables have been a credit concern as inefficiencies in revenue cycle management have resulted in A/R days of 74.9 in 2015, 82.1 in 2014 and 77.8 in 2013, all above the 49.8 days median for the non-investment grade rating category. The concern is compounded in 2016 as the current backlog in receivables could be an issue as MHS goes live on May 1 with a system-wide information system upgrade that integrates its ambulatory physician component. Management reports that the IT vendor is on site to assist in a smooth implementation but Fitch notes that temporary disruptions in revenue cycle may still occur, particularly if the system is still working through a backlog of receivables at the time of the IT implementation.

DEBT PROFILE

All of MHS' long-term debt is fixed rate and MHS is not a party to any derivative agreements.

DISCLOSURE

The system covenants to report on its quarterly results within 60 days and year end results, capital ratios, and coverage calculations within 150 days. Further, the system covenants to report in its DCOH covenant calculation within 30 days of each semiannual calculation date.