MedStar Health Approx $580M Revenue Bonds Downgraded To `BBB+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--May 16, 2000

Fitch IBCA downgrades the underlying rating on approximately $580 million of MedStar Health, Inc.'s (MedStar) bonds (listed below) to `BBB+' from `A'. In addition, Fitch IBCA has removed the bonds from RatingAlert Evolving.

The downgrade primarily reflects MedStar's operating results over the past two audit years and year-to-date, and the upcoming acquisition of Georgetown University Medical Center (GUMC). MedStar's operating loss of $50 million in 1998 escalated to $150 million in 1999. The profit decline is mainly attributable to Baltimore based operations, one time costs of $36.1 million in 1998 and $67.9 million in 1999 associated with hospital and physician practice closures, and rate reductions set forth by the Maryland Health Services Cost Review Commission. While eight-month data (unaudited) for fiscal year 2000 shows some improvement, operating losses remain significant, at $59 million.

In addition, the acquisition of GUMC, which has also suffered significant losses in the past, will pressure MedStar's balance sheet stability. This acquisition coupled with issues surrounding integration of the former Helix Health System hospitals in a rate-regulated Maryland market that has significant competition, will severely test management's ability to achieve system efficiencies and necessary cost reductions. Furthermore, while the company's projections remain conservative (break-even operating performance by 2002), they do not include the GUMC acquisition. Fitch IBCA will continue to monitor MedStar health over the next six months during the GUMC acquisition.

Despite these concerns MedStar remains a leading provider in the Baltimore - Washington corridor, with a strong management team, and good liquidity. Fitch IBCA recognizes management's recent efforts to turnaround financial trends through the elimination of businesses that remain unprofitable and do not contribute to its core business. These include the closure of Church Hospital, and the reduction in the number of employed physicians. In addition, a substantial portion of the insurance risk business associated with Medicare risk is also in the process of being terminated. Fitch IBCA's rating anticipates that the above actions will significantly reduce operating losses in future years. MedStar's strong balance sheet and liquidity ratios remain a positive credit factor, with 170-days cash on hand and cash to debt of 114%.

MedStar Health, the largest integrated health care system in the Baltimore-Washington region is composed of six hospitals (2 in Washington D.C. and 4 in Baltimore). In addition to its six hospitals MedStar Health operates a number of nursing homes, ambulatory facilities, surgery centers, rehabilitation clinics, several large physician networks and the largest home care and durable medical equipment companies in the region.

Outstanding Debt:

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

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

(insured: FSA).

-- $166,605,000 Maryland Health and Educational Facilities

Authority (MD) (Medlantic Helix) revenue bonds, series 1998A

(insured: FSA).

-- $116,910,000 Maryland Health and Educational Facilities

Authority (MD) (Medlantic Helix) revenue bonds, series 1998A

(insured: AMBAC).