Fitch Rates University of Pittsburgh Medical Center (UPMC), PA 2005 Bnds 'A+/F1+'; Upgrades Outstanding.

NEW YORK -- Fitch Ratings has assigned an 'A+' underlying rating to the $105 million Allegheny County Hospital Development Authority, University of Pittsburgh Medical Center (UPMC) revenue bonds, series 2005A bonds. The bonds are expected to be insured by Financial Security Assurance, Inc. whose insurer financial strength is rated 'AAA' by Fitch. Fitch also assigns an 'A+/F1+' rating to the $105 million Allegheny County Hospital Development Authority, University of Pittsburgh Medical Center revenue bonds, series 2005 B bonds. In addition, Fitch upgrades to 'A+' from 'A' the rating on approximately $1.84 billion in outstanding debt listed below. The Rating Outlook is Stable.

The series 2005A bonds will initially be issued as auction rate bonds and the series 2005B bonds will be issued as variable rate demand bonds in the X-Tender Mode. Proceeds of the bonds will be used to refund all of the outstanding Allegheny County Hospital Development Authority, health center revenue bonds (UPMC Health System, formerly known as University of Pittsburgh Medical Center System), series 1995, fund ongoing capital projects, and pay costs of issuance. The bonds are expected to price the week of Nov. 7th via negotiation by Goldman Sachs and Morgan Stanley.

The upgrade of the long-term rating to 'A+' reflects UPMC's continued improvement in profitability. Through the three months ended Sept. 30, 2005, UPMC posted a strong 4.4% operating margin ($59.7 million), compared to 3.7% in fiscal 2005 and 2.7% in fiscal 2004. The improvement in profitability was largely the result of utilization growth in both the inpatient and outpatient settings.

The 'F1+' short-term rating is based on UPMC's long-term credit characteristics, solid unrestricted cash position, and the degree of flexibility provided by the structure of the series 2005B bonds. Each month, bondholders elect to retain the bonds one year in advance of a mandatory tender date, thus shifting the mandatory tender date one month later. In the event that bondholders choose to not retain the series 2005B bonds and they cannot be remarketed after a 15-day remarketing period, UPMC would have one year to determine how they would meet the put. Possible scenarios include converting the bonds to an alternate mode, refinancing the debt, or paying it down altogether. The bonds would continue to bear interest at the same rate during this period. At June 30, 2005, UPMC had $1.8 billion of unrestricted cash and investments, including cash and cash equivalents, corporate debt obligations, U.S. government obligations, and marketable equity securities, which would cover the series 2005B bonds 16.1 times. Fitch has reviewed UPMC's investment policy and allocation and believes that it is sound.

Ongoing credit strengths remain UPMC's strong market position in the western Pennsylvania market, and sound management practices. Bolstered by its 696,611-member health plan and 2,100 employed physician network, UPMC's leading and growing market share of 30.2% in the 10-county region of southwestern Pennsylvania compares favorably to the 18.2% market share of its next closest competitor, West Penn Allegheny Health System's (rated 'B+' by Fitch).

Management practices related to quality outcomes, financial reporting, and integration of its facilities have positioned UPMC to handle potential future challenges. UPMC is one of the only not-for-profit health systems in Fitch's portfolio that is voluntarily adopting section 404 of the Sarbanes Oxley Act. Fitch believes this will lend significant credibility to UPMC's financial reporting. UPMC's quarterly disclosure is comprehensive and includes a balance sheet, income statement, cash flow statement, and management discussion and analysis. UPMC's disclosure can be accessed at www.dac-ey.com and www.upmc.com and is usually completed well before the 60-day requirement. Lastly, management has devoted significant resources toward information technology and training as part of its focus to provide the best quality care to its patients.

Ongoing credit concerns include UPMC's capital plans, the dominance of the Highmark Blue Cross Blue Shield Health Plan (Highmark), and challenges related to its own health plan. UPMC has outlined $1.9 billion in capital spending between 2006 and 2010, $500 million of which will be put toward the construction of a new Children's Hospital of Pittsburgh and related research facility. UPMC plans to issue approximately $374 million of new debt over this time period, but also plans to retire an equal amount of existing debt. The remaining needs will be funded through cash flow, which combined with the planned debt issuance could limit liquidity growth in the short term. UPMC had 156.5 days cash on Sept. 30, 2005 and 102% pro forma cash-to-debt including the issuance of the series 2005 bonds. Additionally, the cost of the children's hospital increased to $575 million in fiscal 2006, compared to its original estimate of $430 million, raising concerns over the potential for future increases.

Highmark, one of UPMC's major third party payors, has a market share of 65% in western Pennsylvania and accounts for approximately 23% of UPMC's gross revenues. While UPMC's 10-year agreement with Highmark affords the system a reprieve from reimbursement negotiations, Highmark's strong control in the market remains a long-term concern due to the potential that future renegotiations could lead to flat or declining reimbursement. However, this concern continues to be mitigated by the growth of UPMC's health plan. UPMC's health plan, which represents approximately 30% of revenues, much like other managed care organizations around the country, may experience pressure on premium increases. On the expense side UPMC will be challenged to continue to find ways to limit increases in administrative and medical costs to maintain operating margins at recent levels.

The Stable Outlook reflects Fitch's belief that UPMC should continue to benefit from efficiencies derived from integration and growth of services, certification of financial controls, and the quality initiatives. Management has budgeted a 2.6% operating margin for fiscal 2006, which Fitch believes is achievable. However, balance sheet growth over the medium term may be limited given UPMC's planned spending for capital projects. Further upward movement in the rating will be contingent upon UPMC's ability to meet its capital obligations while continuing to improve its balance sheet, which Fitch believes would require sustained operating margins in the range of 3%-5%. Conversely, deterioration in balance sheet indicators due to inability to maintain operating margins sufficient enough to fund the capital plan could result in negative rating pressure.

UPMC is a large, integrated health care delivery system with 19 hospitals (operating 3,532 staffed beds), an insurance division, and other related entities. The system is headquartered in Pittsburgh, PA, with operations covering the western half of the state. Total revenue in fiscal 2005 was $5 billion.

Outstanding debt: Note: All insured debt is rated 'AAA'. The ratings displayed here are underlying and as of Sept. 30, 2005:

--$89,800,000 Allegheny County Hospital Development Authority, health center revenue bonds (UPMC Health System, Formerly Known as Presbyterian University Health System, Inc.), series 1990 A, B, C, and D -- MBIA insured, 'A+';

--$79,250,000 Allegheny County Hospital Development Authority, health center revenue refunding bonds (UPMC Health System), series 1992B -- MBIA insured, 'A+';

--$36,815,000 Allegheny County HDA, hospital revenue bonds, series 1993 (Magee-Womens Hospital), 'A+';

--$172,745,000 Allegheny County Hospital Development Authority, health center revenue bonds (UPMC Health System), series 1995 -- MBIA insured, 'A+', which bonds will be defeased with the series 2005 bonds;

--$11,605,000 Horizon Hospital System Authority, hospital revenue bonds, series of 1996 (Horizon Hospital System, Inc.), 'A+';

--$84,970,000 Allegheny County Hospital Development Authority, health center revenue bonds (UPMC Health System,), series 1997A -- MBIA insured, 'A+';

--$40,440,000 Allegheny County Hospital Development Authority, hospital revenue bonds (UPMC Presbyterian, formerly known as Presbyterian-University Hospital), 1988B series B-1, B-2, and B-3, 'A+' (Bank One Letter of Credit);

--$130,390,000 Allegheny County Hospital Development Authority, health center revenue bonds (UPMC Health System), series 1997B -- MBIA insured, 'A+';

--$22,435,000 Allegheny County Hospital Development Authority, Health Center revenue bonds, series 1998 (Canterbury Place), 'A+';

--$34,955,000 Allegheny County Hospital Development Authority, health center revenue bonds (UPMC Health System), series 1998A -- MBIA Insured, 'A+';

--$92,010,000 Allegheny County Hospital Development Authority, health center revenue refunding bonds (UPMC Health System), series 1998B -- MBIA insured, 'A+';

--$208,115,000 Pennsylvania Higher Educational Facilities Authority, UPMC health system revenue bonds, series 1999A -- FSA insured, 'A+';

--$107,145,000 Allegheny County Hospital Development Authority, UPMC health system revenue refunding bonds, series 1999B -- Ambac insured, 'A+';

--$250,000,000 Pennsylvania Higher Educational Facilities Authority, UPMC health system revenue bonds, series 2001A, 'A+';

--$92,550,000 Allegheny County Hospital Development Authority, UPMC health system revenue bonds, series 2002A, 'A+';

--$63,000,000 Allegheny County Hospital Development Authority University of Pittsburgh Medical Center revenue bonds, series 2003A, 'A+';

--$66,650,000 Allegheny County Hospital Development Authority University of Pittsburgh Medical Center revenue bonds, series 2003B, 'A+';

--$6,985,000 Allegheny County Industrial Development Authority, UPMC Health System revenue refunding bonds, series 2002C, 'A+' (Comerica letter of credit);

--$102,125,000 Pennsylvania Higher Educational Facilities Authority, University of Pittsburgh Medical Center revenue bonds, series 2003C, 'A+';

--$80,000,000 Allegheny County Industrial Development Authority, variable-rate demand revenue bonds (Children's Hospital Project), series 2004A (JPMorgan Chase Bank letter of credit), 'A+';

--$68,125,000 Allegheny County HAD, University of Pittsburgh Medical Center revenue bonds, series 2004B-1 and series 2004B-2, 'A+'.

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.