Fitch Ratings Affirms MedStar at 'BBB'; Outlook Revised to Positive.

NEW YORK -- Fitch Ratings affirms the underlying 'BBB' rating on the following outstanding MedStar Health issues:

Maryland Health and Higher Education Facilities Authority

-- $454 million bonds;

District of Columbia 

-- $300 million bonds.

Some of the issues are insured by either Financial Security Assurance, or AMBAC, whose financial insurer strength is rated 'AAA' by Fitch. Fitch has also revised the Rating Outlook to Positive from Stable.

The affirmation and Outlook revision to Positive stems from MedStar's continued improvement in financial performance and sound management practices. Medstar's operating, excess, and EBITDA margins continued to improve in fiscal 2004 to breakeven, 1.4%, and 6.6%, respectively, from negative 1.3%, negative 1.4%, and 4.8% in 2003. This improvement in performance was largely due to increased reimbursement rates for all of MedStar's facilities and good utilization results. Additionally, MedStar's Washington, D.C. facilities showed a significant improvement in operating performance in 2004. The Washington Hospital Center's (WHC) earnings from operations improved to $14.5 million from a negative $14.5 million, and Georgetown University Hospital's (GUH) loss from operations was decreased to $11.7 million in 2004 from $23.4 million in 2003. Fitch believes MedStar's financial improvement can also be attributed to sound management practices, such as divestiture of non-core assets, strategic capital planning, supply chain management and tracking, and revenue cycle management.

The positive results seen in fiscal 2004 have continued in fiscal 2005 and, through the four months ended Oct. 31, 2004 MedStar had a 0.6% operating margin. MedStar is budgeting breakeven operations and a 1.2% bottom line in fiscal 2005 and expects capital spending levels to be near 115% of depreciation expense.

Primary credit concerns include future capital needs and ongoing challenges at Georgetown University Hospital. While Fitch believes MedStar's capital allocation is sound, capital spending has been limited and constrained by poor earnings and light liquidity measures, which resulted in an increase in average age of plant to 10.7 years in fiscal 2004 from 8.2 years in fiscal 2002. Fitch believes liquidity will remain stagnant over the short term due to MedStar's capital needs. Further operating improvement at GUH could be limited by ongoing challenges related to an aging plant, lack of physician office space, and physician recruitment. Management expects GUH to perform better than the 2005 budgeted loss of $11.1 million. Through the first four months ended Oct. 31, 2004 GUH lost only $371,000 from operations.

The Positive Rating Outlook reflects Fitch's belief that favorable reimbursement, good utilization, and management initiatives aimed at creating further system efficiencies will result in continued improvement in operations. Achievement of 2005 budgeted operating and capital spending goals without any deterioration to balance sheet indicators, and continued progress both operationally and financially at GUH could warrant positive movement in MedStar's rating.

MedStar Health is a large, integrated health care system composed of seven hospitals (three in Washington, D.C. and four in Baltimore) with a total of 2,442 operated beds and several other health care related organizations. MedStar had total operating revenues of $2.4 billion in fiscal 2004. MedStar covenants to provide annual and quarterly disclosure to Fitch and bondholders. Quarterly disclosure is very good and includes a balance sheet, income statement, cash flow statement, utilization, and management discussion and analysis and is mailed to all bondholders.

The trustee is also responsible for distributing MedStar's disclosure to the nationally registered municipal securities information repositories. Fitch notes that MedStar does not provide fourth-quarter disclosure to bondholders similar to what is disclosed in the other quarters, which Fitch views negatively; however, management indicated that they are willing to provide information to bondholders supplemental to the audit upon request.

Outstanding Debt affirmed at 'BBB' by Fitch:

-- $170,350,000 Maryland Health and Higher Education Facilities Authority (MedStar Health Issue), revenue refunding bonds, series 2004;

-- $300,000,000 District of Columbia (Medlantic/Helix), multimodal revenue bonds, series 1998A, 1998B, 1998C (FSA Insured);

-- $166,605,000 Maryland Health and Higher Education Facilities Authority (Medlantic/Helix), revenue bonds, series 1998A (FSA Insured);

-- $116,910,000 Maryland Health and Higher Education Facilities Authority (Medlantic/Helix), revenue bonds, series 1998B (AMBAC Insured).