Fitch Rts MedStar's 2004 Bonds 'BBB'; Affs Outstanding Rtgs.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 23, 2003

Fitch Ratings has assigned a 'BBB' rating to the $182 million Maryland Health and Higher Education Facilities Authority refunding revenue bonds MedStar Health Issue, series 2004. In addition Fitch affirms the 'BBB' rating on approximately $746 million of MedStar Health Inc.'s (MedStar) outstanding bonds (listed below). The Rating Outlook is Stable.

Bond proceeds will be used to refund the series of 2001A, 2001B, 2001C, and 2001D bonds ($150 million), fund a debt service reserve fund ($14.2 million), pay costs of issuance ($2.2 million), and pay negative arbitrage and accrued interest ($15.7 million). The bonds are expected to sell the week of Jan. 21 through negotiation led by Citigroup.

The affirmation and Stable Outlook stem from MedStar's improving financial performance in 2004, continued strong operating performance of MedStar's Baltimore facilities, and management practices aimed at greater system efficiency. MedStar was successful in achieving increases from its managed care contracts for its Washington D.C. facilities and received rate increases for its Baltimore facilities which have led to an improvement in financial performance in fiscal 2004.

Through the first three months of 2004 ended Sept. 30, 2003, MedStar posted a negative 1% operating margin ($5.8 million loss), which compares favorably to the previous year and budgeted goals of negative 1.6% ($8.4 million loss), and negative 1.8% ($10.8 million loss), respectively. While MedStar's Baltimore facilities have historically accounted for the almost all of the system's operating profits, management has focused significant attention on the Washington, D.C. facilities.

In particular, management cut 115 positions in June of 2003 at the Washington Hospital Center (WHC), consolidated Georgetown University Hospital's (GUH) heart services at WHC, and expects to realize savings by consolidating certain business functions in the region into the central business office in Maryland. Additionally, through the first quarter of 2004 WHC has posted a profit of 2.2%, while Georgetown continues to be unprofitable and lost $5.6 million from operations.

Despite improvement already seen in 2004, MedStar's greatest challenges remain its Washington, D.C. facilities. GUH is projected to lose $16.7 million from operations in 2004, and profitability continues to be limited by difficulty recruiting physicians, an aging physical plant, and lack of medical office space. WHC is projected to post an operating profit of $3.1 million after several years of losses; however the lack of a safety net provider in the market remains a concern. Additionally, MedStar, not unlike other health systems around the country is impacted by rising expense pressures. In particular, MedStar's pension expense increased 339% to $16.7 million in 2003 from $3.8 million in 2002, and is projected to rise to $24 million in 2004.

In 2004 MedStar is projecting an operating loss of $19.8 million and a bottom line gain of $2.6 million, and is expecting to reach breakeven profitability from operations in fiscal 2005. Fitch believes that improved reimbursement, along with current management initiatives should allow MedStar to meet these projections. However, MedStar's 2003 loss from operations of $29.8 million was well below its budget of $14 million and magnifies the significance of meeting its goals in 2004. Any shortfall in MedStar's 2004 budget could lead to negative rating pressure.

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 2,332 staffed beds, two long term care facilities, two freestanding ambulatory surgery centers, and several other health care related organizations. MedStar had total operating revenues of $2.2 billion in fiscal 2003. MedStar covenants to provide annual and quarterly disclosure to Fitch and bondholders, which to date has been thorough and timely.

Outstanding Debt

-- District of Columbia's $40,000,000 series 2001A multimodal 

revenue bonds (MedStar Health, Inc.);

-- District of Columbia's $32,000,000 series 2001B multimodal

revenue bonds (MedStar Health, Inc.);

-- District of Columbia's $27,500,000 series 2001C multimodal

revenue bonds (MedStar Health, Inc.);

-- District of Columbia's $50,500,000 series 2001D multimodal

revenue bonds (MedStar Health, Inc.);

-- District of Columbia's (Medlantic/Helix) $300,000,000

multi-modal revenue bonds series 1998A, 1998B, and 1998C

(insured: FSA);

-- Maryland Health and Educational Facilities Authority (MD)

(Medlantic/Helix) $166,605,000 revenue bonds, series 1998A

(insured: FSA);

-- Maryland Health and Educational Facilities Authority (MD),

(Medlantic/Helix) $116,910,000 revenue bonds series 1998B

(insured: AMBAC).