Fitch Rates Harris County Hospital Dist (Texas) 2007 Revs 'A'; Outlook Stable.

NEW YORK -- Fitch assigns an underlying 'A' rating to the Harris County Hospital District's (Texas) senior lien refunding and revenue bonds series 2007A ($210 million) and series 2007B ($115 million). Bond proceeds of the tax exempt series 2007A bonds will be used to fund the first phase of Harris County Hospital District's (HCHD) facilities program, refund and refinance outstanding commercial paper of HCHD, and pay costs of issuance. Bond proceeds of the taxable series 2007B bonds, together with certain internal funds, will refund HCHD's existing series 2000 bonds, and pay costs of issuance. The bonds are expected to be insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch. The bonds are expected to price the week of August 20th through negotiation led by Banc of America Securities.

The 'A' Rating and Stable Outlook are supported by ad valorem tax revenues received by HCHD that help to cover the costs associated with the care of the indigent, the essential role the District plays in providing health care services to Harris County's Medicaid and indigent care population, and solid balance sheet measures. The County commissioner's court is authorized to levy ad valorem taxes in an amount not exceeding $0.75 per $100 of assessed valuation of taxable property. While the actual levy has been at around $0.19 for the last several years and is not likely to increase, it provides a significant portion of the costs associated with caring for the indigent. Net tax revenues have increased 27.8% to $422 million in fiscal 2007 from $330 million in fiscal 2003 due to growth in assessed value. The tax revenues accounted for approximately 45% of HCHD's hospital and clinic revenues in 2007. While significant fluctuation in liquidity does occur throughout each fiscal year due to timing of tax revenues and supplemental Medicaid payments, HCHD's days cash on hand and cash to debt at fiscal 2007 (ended February 28, 2007) were a solid 155.9 days and 359.1%, respectively.

Primary credit concerns include a reliance on supplemental Medicaid payments, operating difficulties inherent to running a public hospital system, the growing uninsured population, and significant capital needs. Disproportionate Share (DSH) and Medicaid Upper Payment Limit (UPL) revenue represented a high 20% ($179.9 million) of HCHD's revenues in 2007 making the District susceptible to programmatic changes at the Federal level. HCHD provides the majority of healthcare services to Harris County's uninsured and Medicaid population, and undocumented aliens. Much like other parts of the country, Harris County's uninsured and underinsured population is growing, which places significant strain on the district. Phase I of the capital program will focus largely on expanding HCHD's diagnostic and outpatient capabilities, which may result in improvements in payor mix if patients can get access to services more quickly. While the additional debt being issued is manageable for HCHD, Phase II of HCHD's capital plan, which includes renovation of Ben Taub General Hospital and a new bed tower at Lyndon B. Johnson General Hospital, could place added financial stress on the organization. Phase II is scheduled to begin in 2011 after Phase I is completed.

Located in Harris County, Texas, HCHD is the fifth largest public metropolitan health system in the country and consists of three hospitals, Ben Taub General Hospital, Lyndon B. Johnson General Hospital, and Quentin Mease Community Hospital, and 12 primary care outpatient clinics. Other system components include a foundation and an 110,000 member Medicaid Health Maintenance Organization. HCHD had $999.8 million in operating revenues (excluding bad debt expense which is historically included as a deduction from revenue) in fiscal 2007.

HCHD covenants to provide only annual audited financial statements to bondholders, whereas most public hospitals provide both quarterly and annual audited financial statements to bondholders.

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