Fitch Affirms Idaho Elks Rehab Hospital's Outstanding $13.7MM Revs at 'BBB+'.

NEW YORK -- Fitch Ratings affirms the outstanding 'BBB+' rating assigned to the approximately $13.7 million outstanding Idaho Health Facilities Authority hospital revenue bonds, (Idaho Elks Rehabilitation Hospital), series 1998. The Rating Outlook is Stable.

The rating and affirmation reflect Idaho Elks' strong and improving liquidity position, recent strong operating profitability, manageable debt burden, and dominant market share for rehabilitation services. Liquidity relative to expenses increased to a very strong 377 days cash on hand in fiscal 2004 from 299 days in fiscal 2002, and cash-to-debt improved to a solid 145% from 96% over the same period. The strong liquidity position was bolstered by significant profitability improvement in each of the past two years, with operating margins increasing to 5.4% and 5.9% in fiscal years 2003 and 2004, respectively, from negative 3.1% in fiscal 2002. Management attributes the operating turnaround to improved Medicare and Blue Cross reimbursement, as well as the absorption of costs associated with opening a replacement facility in fiscal 2001, which led to depressed operating margins. Maximum annual debt service (MADS) coverage was a high 3.7 times through the six months ended Nov. 30, 2004 and other capital-related ratios, including debt-to-EBITDA (3.1%) and debt-to-capitalization (23.7%), were sound for the rating category. Fitch views Idaho Elks' niche as a specialty rehabilitation provider favorably. Idaho Elks maintains 65% market share as the only freestanding rehabilitation provider in the primary service area, and the remainder is captured by St. Alphonsus Regional Medical Center.

Concerns center around the newly implemented 75% rule related to Medicare reimbursement for inpatient rehabilitation facilities in addition to Idaho Elks' heavy concentration of governmental payors, narrow breadth of services, and relatively small revenue base. The 75% rule, which will be phased in through July 2007, requires Idaho Elks to demonstrate that at least 50% of Medicare patients receive care for certain medical conditions, starting in February 2006. Currently, about 46% of Medicare patients are receiving care for these conditions and management expects to adjust its case mix before the compliance deadline, which is based upon Idaho Elks' cost-reporting period. Medicare reimbursement to Idaho Elks will be reduced if the 50% threshold is not met, with the concern exacerbated by Idaho Elks' historical reliance on Medicare and relatively small revenue base. Although reduced from recent years, Medicare reimbursement concentration remains high, representing more than 54% of gross revenue.

The Stable Rating Outlook reflects Fitch's belief that Idaho Elks will sustain positive operating and bottom-line margins due to its niche provider status and proactive management practices, including joint ventures with local providers. Despite the potential effects of the 75% rule, management believes the worst-case scenario upon full implementation of the rule will be a $400,000 negative impact. Idaho Elks' current patient census is near the rule's initial 50% requirement, and management has outlined a strategic plan to remain in compliance with the rule as the requirement increases to 75%. However, downward pressure on the rating may occur if the full impact is greater than anticipated.

Idaho Elks Rehabilitation Hospital is a 71-licensed bed comprehensive rehabilitation facility located in Boise, Idaho. Total operating revenues in fiscal 2004 were $22.4 million. Idaho Elks does not covenant to provide annual audited financial statements to bondholders, which is viewed negatively by Fitch. However, management has expressed to Fitch it does provide disclosure to bondholders upon request. Disclosure to Fitch has been adequate on a quarterly basis and includes a balance sheet and income statement. Fitch notes that neither a quarterly statement of cash flows nor management discussion and analysis is provided.