Fitch Rates Clarian Health Partners (Indiana) $382MM Bonds 'A+'; Affirms Outstanding Debt.

CHICAGO -- Fitch assigns an 'A+' rating to Clarian Health Partners, Inc.'s $381.7 million Indiana Health and Educational Facility Financing Authority hospital refunding revenue bonds (Clarian Health Obligated Group), series 2006B bonds, and affirms the 'A+' rating on Clarian Health Partners, Inc.'s (Clarian) outstanding debt listed below. The Rating Outlook is Stable.

The purpose of the financing is to convert Clarian's current variable rate demand bonds into a synthetic variable rate obligation and therefore, the series 2006B issue will be structured as fixed rate bonds. Bond proceeds will be used to refund all or a portion of Clarian's outstanding series 1996B&C bonds, outstanding series 2000B&C bonds and outstanding series 2003H&I bonds plus pay associated costs of issuance. Concurrent with the issuance of the series 2006B bonds, Clarian will execute two fixed-to-floating rate swaps with a notional value and amortization that will match the 2006B bonds. The bonds are expected to be priced the week of Aug. 21 via negotiation by Merrill Lynch & Co. and Citigroup Capital Markets.

The 'A+' rating is due to Clarian's strong liquidity relative to expenses, solid growth in admissions, clinical excellence, association with the Indiana University School of Medicine and leading market position in the competitive Indianapolis market. At June 30, 2006, unrestricted cash and investments totaled $1.17 billion translating into a solid 204.3 days cash on hand, down slightly from the 212.3 days at the end of fiscal year 2005 (ended Dec. 31). Consolidated admissions grew 4.5% in fiscal 2005 after growing just 0.3% in both 2004 and 2003. Through the first half of 2006, admissions increased 7.4% over the comparable period in 2005. This growth has been fueled by the opening of the new Clarian West and Clarian North suburban facilities. Clarian's Methodist/IU/Riley facilities operate a total of 1,384 beds in downtown Indianapolis. Methodist Hospital is one of two Level I trauma centers in Indiana, operates the largest neonatal / pediatric intensive care units in the State and is among the top five transplant programs in the U.S. Clarian is affiliated with the Indiana University School of Medicine, the only medical school in the State. Approximately 65% of IU's medical residents are trained in a Clarian facility and over 70% of IU's pediatric residents are trained at Riley Hospital. For fiscal year 2004, Clarian maintained a leading market share in the Indianapolis metropolitan area of 32.0%, ahead of St. Vincent Hospitals (27.4%; part of Ascension Health, revenue bonds rated 'AA' by Fitch); Community Health Network (19.9%; revenue bonds rated 'A+' by Fitch), and St. Francis Hospitals (11.7%; part of Sisters of St. Francis Health Services).

Primary credit concerns are Clarian's increased debt burden and weaker operating results due to aggressive strategic initiatives. Clarian's ratio of cash to debt has weakened to 81.2% at June 30 from 102.1% at the end of 2005 due to the issuance of $327.1 million of series 2006A bonds in January of this year (see Fitch's report dated Dec. 21, 2005) to fund $293.2 million of various capital projects. Clarian's increased debt burden also includes the issuance of $500 million of debt in 2003 for the construction of 76-bed Clarian West (opened in December 2004) and 182-bed Clarian North (opened in December 2005), which have joint ownership between Clarian (at least 60%) and physicians (up to 40%). All construction projects to date are on time and on budget.

Clarian West and Clarian North are expected to become profitable in fiscal 2008. Fitch believes these projects will allow Clarian to capture additional market share in high-growth areas surrounding Indianapolis while strengthening its hub-and-spoke model in a highly competitive market. In the near term however, the undertaking of these projects has caused operating performance to slip from historical levels. Clarian's 1.7% operating margins in fiscal years 2004 and 2005 are materially below the 2.3%, 5.7% and 2.8% operating margins posted in 2003, 2002 and 2001, respectively. Through the six months ended June 30, Clarian's 0.6% operating margin was impacted by larger than expected start-up losses at the Clarian North facility and increased depreciation and interest expense. Additionally, Clarian and Arnett Clinic formed the Arnett Clarian Health System LLC to jointly own and operate the Clarian Arnett Hospital in Lafayette, IN. The project, which commenced in August, is expected to cost $170 million and will be funded through operations.

Other credit concerns include Clarian's highly competitive service area and high Medicaid load. The lack of certificate of need requirements in Indiana has fueled aggressive expansion plans among Clarian's primary competitors, particularly in cardiology. In 2005, Medicaid accounted for 17.1% of Clarian's gross revenues, up from 15.0% in 2001, which creates significant exposure to cost containment at the state and federal levels.

The Stable Rating Outlook is supported by Clarian's leading market position and acceptable operating profitability. Fitch views Clarian's strategic investments favorably and expects that Clarian's growth strategy in suburban markets will support positive overall utilization trends, which should strengthen its market share position and enhance its payor mix. Clarian's 2006 budget calls for a 1.4% operating margin with improvement to 3.0% in 2008, reflecting positive operations at Clarian North and Clarian West.

Headquartered in Indianapolis, IN, Clarian Health Partners is a large integrated delivery system with five acute care hospitals and a children's hospital in Indiana, with a total of 1,693 operated beds. Total operating revenue in 2005 was $2.28 billion. Clarian has covenanted to provide annual audited financial statements and quarterly disclosure to Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Fitch believes Clarian's disclosure is excellent and includes a balance sheet, income statement and statement of cash flows, management discussion and analysis and utilization statistics. Clarian has been disclosing annual and quarterly financial statements through Digital Assurance Certification LLC (DAC) at www.dacbond.com.

The following outstanding debt is affirmed by Fitch:

--$327,170,000 Indiana Health and Educational Facility Financing Authority hospital revenue bonds (Clarian Health Obligated Group), series 2006A 'A+';

--$87,800,000 Indiana Health and Educational Facility Financing authority tax-exempt auction-rate securities hospital revenue bonds (Clarian Health Partners), series 2005A (1) 'A+';

--$87,800,000 Indiana Health and Educational Facility Financing Authority tax-exempt auction-rate securities hospital revenue bonds (Clarian Health Partners), series 2005B (1) 'A+';

--$76,500,000 Indiana Health and Educational Facility Financing Authority tax-exempt auction-rate securities hospital revenue bonds (Clarian Health Partners), series 2005C (2) 'A+';

--$76,500,000 Indiana Health and Educational Facility Financing Authority tax-exempt auction-rate securities hospital revenue bonds (Clarian Health Partners), series 2005D (2) 'A+';

--$180,000,000 Indiana Health Facilities Financing Authority tax-exempt auction-rate securities hospital revenue bonds (Clarian Health Partners), series 2003A, 2003B, 2003C and 2003D (2) 'A+';

--$225,000,000 Indiana Health Facilities Financing Authority taxable auction rate securities (Clarian health partners), series 2003E, 2003F and 2003G (1) 'A+';

--$95,000,000 Indiana Health Facilities Financing Authority variable-rate demand hospital revenue bonds (Clarian Health Partners), series 2003H (liquidity facility: JP Morgan Chase Bank) and 2003I (liquidity facility: Bank of Nova Scotia 'AA-/F1'; 'A+'/F1+'; (3)

--$182,000,000 Indiana Health Facilities Financing Authority variable-rate demand hospital revenue bonds (Clarian Health Partners), series 2000B (liquidity facility: JP Morgan Chase and Co.) and 2000C (liquidity facility: Bank of Nova Scotia) 'A+'; (3)

--$109,300,000 Indiana Health Facilities Financing Authority variable-rate demand hospital revenue bonds (Clarian Health Partners), series 1996B and C (liquidity facility: JP Morgan Chase and Co) 'A+'/F1+'. (3)

1. Underlying rating. The series 2003E, 2003G, 2005A and 2005B bonds are insured by Financial Security Assurance, Inc., whose insurer financial strength is rated 'AAA' by Fitch. The series 2003F bonds are insured by MBIA Insurance Corp.

2. Underlying rating. Insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

3. These bonds will be redeemed with the series 2006 B bond issue.

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.