CHICAGO–(BUSINESS WIRE)–Fitch Ratings has affirmed Group Health Cooperative’s (GHC) and
subsidiary Group Health Options, Inc.’s (GHO) (collectively Group
Health) Insurer Financial Strength (IFS) ratings at ‘BBB-‘. Fitch has
also affirmed the ratings on senior secured bonds issued by the
Washington Health Care Facilities Authority (WHCFA) on behalf of Group
Health at ‘BBB-‘. The Rating Outlooks are Stable. A complete list of
rating actions can be found at the end of this comment.
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KEY RATING DRIVERS
Group Health’s ratings continue to reflect the company’s strong market
position in Washington, leverage and capitalization metrics that are
consistent with or better than Fitch’s ‘BBB’ rating category guidelines,
and support for the company’s various obligations provided by its
high-quality investment portfolio.
The ratings also reflect the impact of the company’s geographically
concentrated membership and operating profile, comparatively small size
and scale benefits, and weak long-term financial results.
Based on 2012 direct premiums, Group Health is the largest health
insurance and managed care-company in Washington. The company’s
membership consists primarily of employer-group business but also
includes meaningful contributions from Medicare (principally Medicare
Advantage) and individual products.
Group Health’s market position is bolstered by its vertically integrated
health care delivery system which includes both employee care providers
and care providers provided by an independent medical group that
contracts exclusively with Group Health. These care providers deliver
health care services at 26 primary and specialty care facilities owned
and operated by GHC.
Group Health has developed urgent care facilities in areas of
concentrated health plan membership to facilitate providing care in a
lower cost setting. However, Fitch’s view is that expenses need to be
better managed for the company to achieve positive ratings momentum.
Group Health’s large market share in Washington results in a
concentrated geographic footprint, which exposes the company to overall
economic and competitive conditions in the state. Fitch notes that this
market concentration also enables Group Health to more effectively
manage utilization management with its provider network.
GHC’s key capitalization metrics are generally consistent with or better
than ‘BBB’ rating category median guidelines and Fitch views the
company’s premium and asset leverage to be comparably low. The company’s
year-end 2012 NAIC risk-based capital (RBC) and premiums-to-surplus
ratios were 208% and 5.2x respectively. GHC’s year-end 2012
debt-to-EBITDA ratio was 3.1x while its Financial Leverage Ratio was 19%.
Group Health’s 2008-2012 financial results were weak as the company
struggled to cope with operational issues that resulted from its gradual
expansion outside its traditional strength HMO plan. The company’s
2008-2012 average EBITDA-to-revenue and average net return on average
capital ratios were 1.42% (0.1%) respectively.
In an effort to improve its financial performance, Group Health
implemented a study in the fourth quarter 2012 of its internal processes
and expense structure. In connection with this study, the company
anticipates re-designing many of its processes and eliminating a
significant number of full-time equivalent positions. Group Health
estimates the annual expense savings from this headcount reduction at
$200 million-$220 million by the end of 2013.
The company generated strong first quarter 2013 (1Q’13) financial
results as higher premium rates and a decline in expenses, particularly
in medical expenses incurred for external delivery services, generated
EBITDA-to-revenue and net annualized return on average capital ratios of
11.8% and 13.8% respectively. Both of these metrics are significantly
higher than Fitch’s ‘BBB’/’BB’ rating category median guidelines.
At March 31, 2013, Group Health had obligations to the Washington Health
Care Facilities Authority (WHCFA) totaling approximately $140 million.
The WHCFA in turn has issued a like amount of senior amortizing bonds,
secured by a security interest in Group Health’s gross receivables and
liens on certain Group Health real estate assets and equipment.
Group Health’s annual coupon and amortization payments are relatively
modest at $12 million per year through 2019.
EBITDA-based interest coverage ratios, excluding the impact of an
interest rate swap contract Group Health has entered into that reduces
the company’s interest rate expense during periods of declining interest
rates, was 4.9x in 2012 and averaged 7.3x from 2008 through 2012.
Key rating triggers that could lead to an upgrade include run-rate:
–EBITDA/revenue margins approximating 5%;
–Net income/average capital ratios approximating 5%;
–Debt-to-EBITDA ratios and debt-to-capital ratios that are less than
3.0x and 20%; respectively;
–EBITDA-based interest coverage ratios that exceed 7x.
Key rating triggers that could lead to a downgrade include run-rate:
–EBITDA/revenue margins that are less than 3%;
–Net income/average capital ratios that are less than 3%;
–NAIC RBC ratios (company action level basis) below 200%;
–Debt-to-EBITDA ratios and debt-to-capital ratios greater than 3.0x and
–Loss of key contracts that contribute significantly to membership.
Fitch has affirmed the following ratings:
–$99.7 million series 2006 revenue bonds issued by the Washington
Health Care Facilities Authority on behalf of Group Health Cooperative
–$45 million series 2001 revenue bonds issued by the Washington Health
Care Facilities Authority on behalf of Group Health Cooperative at
–Group Health Cooperative – IFS at ‘BBB-‘;
–Group Health Cooperative – IDR at ‘BB+’;
–Group Health Options, Inc. – IFS at ‘BBB-‘.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Insurance Rating Methodology’ (Jan. 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology – Amended
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