Fitch Rates Group Health Cooperative (WA) $100MM Series 2006 Bonds 'A-'.

CHICAGO -- Fitch assigns an 'A-' underlying rating to Group Health Cooperative's (GHC) $100 million series 2006 revenue bonds issued through the Washington Health Care Facilities Authority. In addition, Fitch assigns an underlying 'A-' rating to the outstanding series 1991 and 2001 bonds (listed below).

Fitch has also assigned the following:

GHC

--Issuer Default Rating (IDR) of 'A-' ;

--Insurer financial strength (IFS) rating of 'A'.

Group Health Options, Inc.

--IFS rating of 'A'

The Rating Outlook on all the ratings is Stable.

The series 2006 bonds will be insured by Radian Asset Assurance, whose financial strength is rated 'AA', with a Negative Outlook, by Fitch. The bonds are expected to be sold as fixed-rate debt during the week of Oct. 23 through negotiation by Citigroup, Inc.

The difference between the underlying rating on GHC's 2006 revenue bonds and its IFS rating reflects the subordination of debt obligations relative to policyholder obligations when debt is issued out of a regulated operating company. This is consistent with Fitch's insurance industry notching methodology, which is explained in detail in the insurance section of the Fitch Ratings web site at www.fitchratings.com.

The 'A-' rating reflects GHC's light debt burden, improved operating profitability, and the benefits of GHC's leading HMO market share position in Washington state. With the issuance of the series 2006 bonds, GHC's maximum annual debt service (MADS) will increase to $16.3 million from $11.3 million. Pro-forma MADS as a percentage of revenues was a very light 0.7% at fiscal year end 2005 (ended Dec. 31). GHC's unrestricted cash and investments of $725 million at June 30 2006 is more than 3 times (x) pro-forma long-term debt. GHC has generated solid operating profitability since 2002 after several years of marginal net gains. After recording a small operating loss in 2002, GHC posted positive operating margins of 7.4%, 4.7%, and 4.0% in 2003, 2004 and 2005, respectively. Similarly, historical pro-forma debt service coverage has been very strong at 12.3x, 9.6x, and 9.7x in 2003, 2004 and 2005. GHC has been able use its reputation and position as the leading HMO provider in Washington State to achieve better contract pricing with employer groups. Fitch believes that HMO enrollees tend to be somewhat less price sensitive due to the large number of primary care physicians in the GHC network being exclusive providers.

Primary credit concerns include steady enrollment decline in GHC's core HMO product, the risks associated with GHC's expansion into point of service and preferred provider contracts, and the rate of growth in contracted medical services. From 2002-2006, enrollment in GHC's Group HMO declined approximately 4.2%, which reflects the increasing contract choice offered in the market. In response, GHC is developing certain HMO-like products and acquired KPS Health Plan in 2005 to expand its PPO business line. Fitch believes that as consumers and employers demand greater choices the ability to appropriately price the various product offerings becomes more difficult. The growth in external delivery expenses (i.e. the cost of contracted medical services) has exceeded the growth of total revenues over the last three years. While total revenues have grown 16.1% from 2003-2005, external delivery expenses have climbed 28.5%. To date management has effectively blunted the negative impact of rising external delivery expenses through effective control of internal expenses. Over time Fitch believes it maybe increasingly difficult for GHC to offset cost increases as a purchaser of health services through expense control of its owned and operated services.

Fitch's Stable Outlook reflects GHC's position as the largest HMO plan and provider HMO in the state. Over one third of GHC total Group/Commercial contracts are with governmental entities that Fitch believes are less sensitive to benefit costs than private employers. Fitch believes these public entities provide a certain contracting stability.

GHC is a not-for-profit membership corporation operating as a health maintenance organization. GHC operates an integrated health care delivery system providing coverage throughout most of Washington State and northern Idaho through owned and contracted services providers. In 2005, GHC had approximately 582,537 members in all health plans and total operating revenues of $2.3 billion. GHC covenants to disclose quarterly and annual disclosure to bondholders.

Fitch rates the following:

--$100,000,000 Washington Health Care Facilities Authority revenue bonds, series 2006 (Group Health Cooperative) 'A-'.

(Note this is the Underlying rating. The bonds are expected to be insured by Radian Asset Assurance, whose insurer financial strength is rated 'AA', with a Negative Outlook by Fitch.)

Outstanding Debt:

--$66,000,000,000 Washington Health Care Facilities Authority revenue bonds, series 2001 (Group Health Cooperative) 'A-' (1);

--$45,000,000 Washington Health Care Facilities Authority revenue bonds, series 1991 (Group Health Cooperative) 'A-' (2).

(1) Underlying rating. The bonds are insured by Ambac, whose insurer financial strength is rated 'AAA' by Fitch.

(2) Underlying rating. The bonds are insured by MBIA, whose insurer financial strength is rated 'AAA' by Fitch.

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.