Saturday, November 28, 2009

Fitch Upgrades Shannon's Bonds in Dire Environment

Shannon Health System's bonds rose from BBB to BBB+ in the midst of a credit storm and a contentious health reform effort. The issuing agency is Tom Green County Health Facilities Development Corp., but the bonds are backed by Shannon's revenues. Fitch cited several interesting items:

1. Fitch views as a significant positive credit factor the strong support Shannon has historically received from the Shannon Trust (Trust), which had approximately $65.5 million in net assets in 2008.

2. Shannon Medical Center has 55% market share to Community Medical Center's 39%. These numbers have been stable between 2006 & 2008.

3. Shannon plans to call the $15.2 million in hospital revenue bonds in 2011. It will pay bondholders back early.

4. For the fourth consecutive year, Shannon Health System recorded a loss from operations, approximately $5.6 million (a negative 1.9% margin) through the September 2009 period. Shannon's losses from operations stem primarily from additional expenses associated with hiring locum tenens physicians, winding down Shannon's Legacy Health Plan, and higher employee health benefit expenses. Management is budgeting for the system to lose approximately $7 million in FY2010.

5. Shannon's service area, primarily the Concho Valley, has both stagnant population growth and below-average wealth indicators, reflected in a high 11.5% Medicaid payor percentage in 2009.

6. Although operations are expected to be negative in fiscal 2010, the organization has significant support from the Trust, which transferred an average $4.4 million per year over the last four fiscal years to Shannon for capital expenditures.

The report did not cite the Concho Valley's legions of uninsured people. Historically, Shannon's ER saw 80% of uncovered patients, Community Medical cared for 20%. Support from the Trust is critical to hospital operations. It also supports significant physician subsidies in some specialty areas, referred to in the report as locum tenens coverage. Shannon Clinic's 990 report showed expenses associated with two locum tenens firms, costing $1 million in 2008.

To thrive in an era of managed care CEO Tom Alexander and Managing Trustee Lester Smith built the Shannon Health System in the mid 1990's. The system started La Esperanza Clinic (a federally qualified health center), purchased the multi-specialty Angelo Clinic Association (renamed Shannon Clinic), seeded the area with rural health clinics and bought a small insurance company, which became Legacy Health Plans.

The rural health clinics died first. Most closed, but the few profitable ones rolled into the Shannon Clinic. The System played hard ball with physicians, become an employee under a relative value unit payment arrangement or leave. Most chose to stay. Legacy Health was next for dis-assembly.

Here's the irony. Health reform brings back managed care under a new name, "accountable care organizations." Capitation, the managed care payment method, is now "bundled payment." The move implies a new round of provider integration, vertical and horizontal. Three years ago, Shannon Medical Center planned to merge with Community in a new for-profit joint venture under the auspices of Triad Hospitals. The deal fell apart under further scrutiny, but it would not have been consummated.

Triad sold out to Community Health Systems (CHS), now the largest for-profit hospital chain. CHS rejected Triad's joint ventures. This provided ex Triad CEO Denny Shelton a niche. With the support of CCMP Capital, Shelton started Legacy Hospital Group. He's doing deals like the one that fell apart. Shelton's current and prior board members, Nancy-Ann DeParle, Uwe Reinhardt and David Bernd, are in sweet spots as reform progresses.

Nancy-Ann DeParle-White House Health Czar, ex-board member for for-profit health care firms

Uwe Reinhardt-Princeton health care economist advising on reform, board member for many of the same companies

David Bernd-White House visitor log-April 3, 2009

Will Shannon and LHP Hospital Group resurface past plans? Will Shannon use its good credit alone to re-integrate San Angelo health care? Fitch doesn't cover such questions.

However, Shannon added a new division in 2008, Shannon Medical Management Management. It's primary purpose is to provide management services to the Shannon Clinic. Odd, I thought the Shannon Health System (SHS) did that.

SHS may be headed the way of Legacy Health Plans. Its 2008 990 shows virtually no program service revenue, over $7 million in 2007. The system is a dwindling shell holding revenue bonds and paying Vinson & Elkins legal fees. Will it close in 2011, when the bonds are called and any qui tam lawsuit settled? The shell game continues.

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