Standard & Poor's Ratings Services has lowered its long-term rating on revenue bonds issued on behalf of Children's Hospital of Oakland (Calif.) in the wake of that institution's continuing operating losses.
S&P dropped the Oakland Children's revenue bonds from 'A' to 'A-', although the firm noted that the outlook was stable. The bonds were issued by the Association of Bay Area Governments Finance Authority For Nonprofit Corps., on behalf of Oakland Children's.
"The lowered rating reflects our view of Children's persistent operating losses," said Standard & Poor's credit analyst Geraldine Poon. "The lowered rating also reflects Children's longer-term history of volatile operating performance, weak coverage levels, and a challenging payer mix."
Children's has struggled with an inability to cover costs from operating revenue, due to a high mix of Medi-Cal patients, although the hospital's management team indicates it has developed a broader strategy of physician outreach and additional ambulatory services to diversify its referral sources and revenue mix.
"Should management realize its goal of break-even performance in fiscal 2011, a positive rating action is possible," Poon said. "Larger operating losses, while not expected, would result in a further negative rating action."
Children's is a leading tertiary pediatric provider in the San Francisco Bay Area and has what rating agencies consider a solid niche for specialty pediatric services in the region.
However, the institution operates in a particularly competitive service area for general pediatric services, and attracting more commercially insured patients has been challenging, Poon said.
Competition for the tertiary pediatric business is relatively limited, with UCSF Medical Center in San Francisco and the Lucile Salter Packard Children's Hospital in Palo Alto being the closest other specialty children's hospitals.