Fitch Dwngrds $32MM Ohio Valley Health, WV Bonds to 'B+', Otlk Stble.

NEW YORK -- Fitch Ratings downgrades to 'B+' from 'BB' the rating on $11,730,000 County Commission of Ohio County, WV health system refunding and improvement revenue bonds (Ohio Valley Medical Center issue), series 1998A, the $4,085,000 County Commission of Ohio County, WV health system refunding and improvement revenue bonds (Ohio Valley Medical Center issue), series 1998B (taxable), and the $16,165,000 County of Belmont, OH health system refunding and improvement revenue bonds (East Ohio Regional Hospital issue), series 1998. The bonds are partially insured by ACA Financial Guaranty Corporation. The Rating Outlook is Stable.

Ohio Valley Health Services and Education Corporation's (OVHSEC) rating downgrade is due to continued operating losses, upcoming capital needs, and weaker liquidity levels. Operating losses have increased to negative $5.3 million (margin of negative 3.6%) in 2003 from negative $3.1 million (margin of negative 2.4%) in 2002. OVHSEC is in the early stages of a $10 million capital plan to replace aged operating rooms at its Ohio facility. The project is being financed with a $5 million bank loan with a 20-year term, $3 million through fundraising efforts, and $2 million from existing bond funds. However, Fitch is unsure that OVHSEC will be able to raise the entire fundraising amount for the project. It is also anticipated that the bank loan will be secured by a mortgage pledge, which is not available to existing bondholders.

Further weakening bondholder security, OVHSEC has an outstanding line of credit of $2.3 million collateralized by its investment securities. Capital needs at OVHSEC are substantial with an average age of plant of 20 years, which is the highest ever recorded by Fitch, and capacity constraints at the Ohio facility. Liquidity is very weak at 32.7 days cash on hand and factoring in the line of credit it would drop to 25.5 days at June 30, 2004. With the additional debt, cash to debt declines to 24.1% during the same period, compared with 26.4% in 2003. MADS coverage, which includes debt service on the new debt, is 0.6 times (x) in 2002 and 1.4x in 2003.

Other risks include the difficult malpractice environment in West Virginia (WV) and the unfavorable service area characteristics. Operations were largely affected by a doctors' strike in early 2003 at Ohio Valley Medical Center (OVMC) in WV due to skyrocketing malpractice premiums. OVHSEC's malpractice premiums have increased to $4.7 million in 2003 from $1.1 million in 2001, while at the same time its malpractice insurance coverage has been reduced considerably. Tort reform has since then passed, which limits the amount of non-economic damages awarded in a potential lawsuit. However, the flight of physicians out of WV into neighboring Ohio has been significant. The service area characteristics in WV remain unfavorable, with low income levels, a concentration in steel manufacturing, and high unemployment. Two steel companies in the area have recently emerged from bankruptcy; however, staff downsizing and layoffs have occurred. As a result, bad debt has risen to 6.9% of revenues through the interim six months of 2004 from 5.6% in 2003. Medicaid and self-pay is high at 11.5% and 4.0% in 2003, respectively.

The Stable Outlook is supported by OVHSEC's continued strategic focus at its Ohio facility, which has led to improved operations and the implementation of cost-cutting initiatives. OVHSEC has downsized services provided by OVMC, while concentrating more on the complement of services provided at East Ohio Regional Hospital (EORH) in Ohio. Income from operations at EORH increased to $1.3 million (operating margin of 2.1%) in 2003 from near breakeven in 2002, compared with a loss of $4.4 million (excludes losses at Peterson Rehabilitation Hospital) at OVMC in 2003. Through the interim six months of 2004, operating income for OVHSEC improved to a loss of $373,000 (negative 0.5% operating margin) resulting in MADS coverage of 1.4x. Management believes the performance through the six months is reflective of year-end results for 2004. OVHSEC has been successful in redirecting much of the physician flight to EORH. As a result, patient volume has exhibited strong growth at EORH with discharges, outpatient surgeries, and emergency room visits increasing 15.7%, 7.3%, and 8.9% in 2003, respectively, over the prior year. In addition, OVHSEC has undertaken cost-cutting initiatives such as the sale of Peterson Rehabilitation Hospital in 2003, which lost $714,118 in 2002 and $985,788 in 2003. Furthermore, OVHSEC hired Cardinal Health in 2004 to identify cost-savings opportunities related to labor productivity and utilization, reductions in average length of stay, and supply costs. The initiatives are anticipated to have potential annual savings of $1.4 million.

OVHSEC is a two-hospital system consisting of Ohio Valley Medical Center, located in Wheeling, WV, and East Ohio Regional Medical Center, located in Martins Ferry, OH. The system had a combined total of 243 acute-care beds and 94 long-term care beds with total revenues of $148 million in 2003. OVHSEC's disclosure to Fitch has historically been adequate and timely. OVHSEC covenants to only provide annual disclosure within 150 days after the end of the fiscal year. However, the fiscal 2003 audit was received a month late by Fitch. Audits are made available at nationally recognized municipal securities information repositories. Quarterly disclosure to Fitch includes management discussion and analysis, financial statements (includes balance sheet, income, and cash flow statements), and utilization statistics.