Fitch Affirms Good Shepherd Medical Center, Texas, at 'BBB'.

NEW YORK -- Fitch Ratings affirms the 'BBB' rating on the approximately $117 million outstanding Gregg County Health Facilities Development Corporation hospital revenue bonds that were issued on behalf of Good Shepherd Medical Center (GSMC) as listed below. The Rating Outlook is Stable. GSMC also has outstanding $21.4 million of variable-rate demand refunding series 2004 bonds that are backed by a direct pay letter of credit provided by KBC Bank N.V. Fitch was not asked to provide a rating on the series 2004 bonds; however, the series 2004 bonds are on parity with the outstanding fixed-rate bonds.

The rating affirmation is supported by GSMC's improved operating performance and liquidity growth since Fitch's last review in February 2005. Operating income surpassed Fitch's expectations in 2005 by increasing to $6.9 million (2.4% operating margin) from negative $4.5 million (negative 1.8% operating margin) in fiscal 2004. The operating improvement is attributed largely to a strategic pricing increase, improved accounts receivable management, better patient case management in the emergency department, and the resolution of a contract dispute between physicians and Blue Cross that had a negative impact on utilization in fiscal 2004. Days in accounts receivable fell to 49.0 days at September 30, 2005 from 62.3 days at the same period the prior year, which supported GSMC's healthy revenue growth and helped bolster liquidity to 170 days cash on hand (DCOH) and 63.1% cash to debt at Sept. 30, 2005 from 132 DCOH and 48.3% cash to debt at Sept. 30, 2004.

Other strengths remain GSMC's leading market position and clinical reputation as a tertiary referral center. Given the high level of acuity of care provided at GSMC, no comparable hospital is located within 40 miles. As a result, GSMC maintains a strong 53% market share in its primary service area.

Primary credit concerns include GSMC's poor payor mix, heavy debt load, and flat inpatient volume growth. Self-pay represented a high 15.9% of GSMC's gross revenues in 2005. GSMC's high self-pay patient base has historically resulted in substantial year-over-year increases to bad debt expense, which represented a high 22.9% of net revenues in 2005. Maximum annual debt service as a percentage of revenue and debt to capitalization are somewhat high for the rating category at 4.4% and 54.1%, respectively, in fiscal 2005, versus Fitch's 'BBB' medians of 3.5% and 48.8%, respectively.

The Stable Rating Outlook is based on Fitch's belief that GSMC will achieve its 3% operating margin budget in fiscal 2006, given its improved revenue cycle and case management practices. Nevertheless, GSMC's high and rising bad debt expense related to the growing indigent and self-pay patient base is a concern and may constrain further significant profitability improvement. GSMC has no major capital needs and no plans to issue additional debt in the near to medium term.

GSMC operates an acute care hospital with 339 staffed beds in Longview, TX (approximately 100 miles east of Dallas). In addition, GSMC acquired a 25-bed critical access hospital in Linden, TX, in fiscal 2005. GSMC covenants to provide bondholders audited financial statements within 180 days of the fiscal year-end and to provide quarterly disclosure upon written request. Quarterly financials include a balance sheet, income statement, cash flow statement, and management discussion and analysis. GSMC has no swaps outstanding.

Outstanding GSMC debt rated 'BBB' by Fitch:

Gregg County Health Facilities Development Corp.

-- $75,000,000 hospital revenue bonds, series 2000;

-- $35,205,000 hospital revenue bonds, series 2002A;

-- $9,770,000 hospital revenue bonds, taxable series 2002B.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.