Fitch Rates Allina Health System's (MN) Series 2021 Bonds 'AA-'; Affirms Existing Ratings
Fitch Ratings - Chicago - 20 Oct 2021: Fitch Ratings has assigned 'AA-' ratings to $300 million of series 2021 taxable fixed rate revenue bonds to be issued by Allina Health System (Allina) and $200 million of series 2021 tax-exempt fixed rate revenue bonds to be issued by the City of Minneapolis, MN on behalf of Allina. Fitch has also affirmed at 'AA-' Allina's Issuer Default Rating (IDR) and Allina's existing revenue bonds (issued directly by Allina or by the Minneapolis & St. Paul Housing & Redevelopment Authority on behalf of Allina).
The Rating Outlook is Stable.
Proceeds from the series 2021 taxable and tax-exempt debt issuances will be used to fund Allina's capital spending and for general corporate purposes. The bonds are expected to price the week of Nov. 1.
Bondholders have a security interest in pledged revenues and a negative lien pledge on property of the obligated group (OG). The OG includes Allina's owned hospitals and other subsidiaries and accounts for virtually all of the consolidated system's revenue. Fitch's analysis is based on the consolidated Allina Health System.
The affirmation of the 'AA-' IDR reflects Allina's continued strong capital-related ratios despite the debt issuance. The rating also considers the organization's leading position in a favorable service area and improving operating results in interim fiscal 2021, following a challenged fiscal 2020. Nevertheless, Allina's financial profile of 'a' reflects the added risk presented by the added debt and the fact that the associated capital-related ratios, while still strong, are tempered by the issuance.
The Stable Outlook reflects Fitch's expectation that Allina's operating performance should continue to rebound to levels more consistent with historical trends and that the balance sheet should continue to be sound.
KEY RATING DRIVERS
Revenue Defensibility: 'bbb'
Market Leader in Competitive Twin Cities Area
Allina is the inpatient market share leader in the Minneapolis/St. Paul metropolitan area, although the market is competitive. Demographic indicators in the metro area are stable, and combined Medicaid and self-pay should remain well below Fitch's midrange threshold of 25%.
Operating Risk: 'bbb'
Improved Operating Results in Interim Fiscal 2021 Portend Return to Historical Trends
Allina's rebound in operating margin through six-months fiscal 2021 supports the system's midrange operating risk profile assessment. Prior to the pandemic and challenges faced in fiscal 2019, Allina had a track-record of strong profitability. Capital spending plans are robust, and the system's average age of plant measured a sound 12.4 years at FYE 2020 (Dec. 31 year-end).
Financial Profile: 'a'
Capital-Related Ratios Remain Strong
Allina's financial profile remains reasonably strong despite the new debt issuance. Net adjusted debt remains favorably negative in the forward-looking scenario analysis, including in the stress case.
Asymmetric Additional Risk Considerations
There are no asymmetric risk factors associated with Allina's rating.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Continued rebound in operating metrics such that Fitch expects the operating EBITDA margin to be sustained closer to 9% or better, warranting a strong operating risk profile;
--Materially stronger liquidity and capital-related ratios, particularly if Allina's operating risk assessment improves
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Unexpected protracted reversion in operating margins such that the operating EBITDA margin were expected to be sustained at or below 7% for a sustained period;
--Compression in liquidity and capital-related ratios, to the point where cash-to-adjusted debt in the stress case of the forward look is expected to remain well below 190%.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Allina is a comprehensive delivery system that owns and operates 10 hospitals and jointly owns and operates an additional hospital, including tertiary referral centers in Minneapolis, St. Paul and Coon Rapids, a large multidisciplinary employed physician practice, and multiple clinics and retail pharmacies throughout the Twin Cities metropolitan area and eastern Minnesota. Allina also includes a joint venture (JV) health plan with Aetna, which was launched in 2018 and currently has roughly 27,000 members. The system's total operating revenue exceeded $4.3 billion in audited fiscal 2020.
Allina's combined Medicaid and self-pay represented roughly 17% of fiscal 2020 gross revenues, consistent with prior years despite the pandemic and below the midrange assessment threshold of 25%. The system maintains a sound payor mix despite the system's position as the largest newborn delivery network in the metro area. Minnesota expanded Medicaid under the Affordable Care Act (ACA). The market includes the Hennepin County Medical Center, a safety net hospital.
Allina and Blue Cross Blue Shield of Minnesota (BCBS) agreed to a six-year, value-based agreement in 2020. The contract rewards Allina for maintaining top quality metrics, with the overall goal of reducing the total cost of care. BCBS is the largest commercial/managed care payor in Minnesota. The agreement includes reimbursement for telehealth visits, which have become much more prevalent as a response to the coronavirus pandemic. Allina also developed a similar partnership with HealthPartners's health plan and the organization also has a joint venture health plan with Aetna in the market. All of these are a part of Allina's long-term strategy to shift from fee-for-service to population health, value-based reimbursement.
Allina is the market share leader in the Twin Cities area, albeit facing considerable competition. Based on data provided by management, in 2020 Allina captured about 31% of admissions of a very broad 11-county service area that extends into Wisconsin. The system's market share position has been very stable in recent years. Allina faces competition from notable providers, including Fairview Health Services (roughly 29% share), HealthPartners (18%), and North Memorial Health (9%).
The market also includes Children's Health Care Minnesota (rated AA). Allina and Children's have programmatic joint ventures for maternal and fetal specialty care known as the Mother Baby Centers, which are co-located with Allina perinatal programs.
Allina's service area characteristics are favorable. As a major metropolitan area, the Twin Cities benefits from a diversified economy, which is among the most robust in the upper Midwest. Population growth in many key counties in the service area are in-line with or above state and national averages, including Hennepin (Minneapolis), Anoka, Dakota, and Scott. The median household income level in each of those counties exceeds the national rate and the unemployment rate in the Minneapolis-St. Paul-Bloomington MSA is below the national average.
Allina's operating margins are rebounding in interim fiscal 2021, suggesting an eventual return to results more consistent with historical trends. Through six-months unaudited fiscal 2021 (as of June 30, 2021), Allina recorded a 3.6% operating margin and 8.5% operating EBITDA margin. These results compare very favorably to -0.8% and 4.7%, respectively, in full-year fiscal 2020.
The genesis of Allina's operating improvements was actually in 2019, in which the system generated considerable gains in the second half of the year, allowing the organization to react to the challenges presented by the coronavirus pandemic in 2020. Key operating enhancements (many of which were accelerated during the pandemic) include: increased access points as part of more consumer-focused delivery; continued evolution from a holding company to a fully-integrated healthcare delivery system; revenue cycle enhancements; rollout of the aforementioned JV health plan with Aetna and the new agreement with BCBS; and ongoing expense savings such as supply initiatives.
These strategic improvements, as well as organic rebound in volumes in the first half of 2021, compared to the same period 2020, resulted in approximately $230 million gain over the first half of fiscal 2020. Allina also benefited from recording approximately $38 million of CARES Act grants in the first half of fiscal 2021.
Fitch expects Allina to continue to benefit from the operating rebound and to leverage its leading market position of a favorable service area. Long-term, operating margins should remain profitable and Fitch believes the organization will sustain an operating EBITDA margin consistent with a midrange assessment (i.e., an operating EBITDA margin in the 7% range), or even better.
Allina's capital spending plans are robust but manageable. Between 2021 and 2025 the system has approximately $1.6 billion of capex planned, which should translate to a capital spending ratio of approaching 1.5x. The system's capital spending ratio averaged nearly 1.2x between 2016 and 2020, and its average age of plant measured a sound 12.4 years at FYE 2020. Highlighted projects include parking and infrastructure investments at Abbott Northwestern Hospital, renovations at Mercy Hospital in Coon Rapids, and various ambulatory investments.
Allina's financial profile remains reasonably strong despite the debt issuance in the context of the system's midrange revenue defensibility and midrange operating risk profile assessments.
Pro forma debt measures nearly $2 billion, inclusive of the series 2021 financing and operating leases (which are now captured on the balance sheet). Unrestricted cash and investments measured approximately $3.2 billion at unaudited June 30, 2021 (excluding Medicare advance payment funds).
Debt equivalents include two defined benefit (DB) pension plans under Allina's direct control. Collectively at FYE 2020, the DB pensions were 74% funded on a combined projected benefit obligation (PBO) of roughly $60 million. In calculating adjusted debt, Fitch counts the portion of DB pension plans below 80% funded (which translates to approximately $3 million in Allina's case).
In addition, Allina's nurses participate in the Twin City Hospitals Minnesota Nurses Association Pension Plan (Plan). Per management, Allina is responsible for approximately 44%-45% of the MNA pension plan's vested liability and the Plan is more than 80% funded. Consequently, Allina's pro forma adjusted debt (pro forma direct debt plus underfunded DB pension below 80% funded) is nearly identical to direct debt of nearly $2 billion. Pro forma net adjusted debt (adjusted debt minus unrestricted cash and investments) is favorably negative at approximately -$1.3 billion.
Even with the new debt, Allina's capital-related ratios remain reasonably strong in the forward look of Fitch's scenario analysis. Based on unaudited balance sheet as of June 30, 2021 and including the series 2021 bonds, pro forma net adjusted debt-to-adjusted EBITDA is favorably negative at better than -3x, and pro forma cash-to-adjusted debt is just above 160%. In the forward look, net adjusted debt-to-adjusted EBITDA remains favorably negative through the cycle in both the base case and stress case. Cash-to-adjusted debt dips just below 160% in the early years of the stress case before rebounding to nearly 190% by year four. Allina has limited debt capacity at the current rating level in the near term beyond the series 2021 financing.
Asymmetric Additional Risk Considerations
There are no asymmetric risk factors associated with Allina's rating.
Dr. Penny Wheeler, Allina's CEO, is retiring. Lisa Shannon, the current President and COO will assume the CEO position in January 2022. Dr. Wheeler will continue on the board.
Unrestricted cash and investments measured approximately $3.2 billion at June 30, 2021 (excluding Medicare advance payment funds). Cash on hand measured nearly 260 days at FYE 2020 and nearly 270 days at June 30, 2021 and does not pose an asymmetric risk.
Pro forma, Allina has nearly $2.0 billion of direct debt, inclusive of operating leases and the $500 million of series 2021 bonds. Approximately $285 million of debt is variable rate, primarily in series 2007C and series 2009B&C variable rate demand bonds (VRDB), with also a very small amount in auction rate. The VRDBs are supported by letters of credits (LOC) from Wells Fargo and JPMorgan. The LOCs terminate in January 2023 and January 2024. Pro forma smooth maximum annual debt service (MADS) is $119 million. Pro forma MADS coverage based on fiscal 2020 results is 3.2x; coverage should improve in fiscal 2021 with better operating results (pro forma MADS coverage based on six-months fiscal 2021 results annualized is about 6x). MADS coverage does not pose an asymmetric risk.
Financial covenants included in Allina's bond documents include a minimum historical debt service coverage of 1.00x (event of default if cash on hand falls below 75 days for first year; hard default after two years). In addition, Allina has covenants related to banks and insurers on outstanding debt that includes minimum MADS coverage of 1.25x (additional indebtedness); minimum cash on hand of 50 days (consultant call-in) and 40 days (event of default); and maximum debt-to-capitalization ratio of 65%.
Allina has five fixed payor swaps. Counterparties are diversified among Goldman Sachs, US Bank, Wells Fargo, and JPMorgan. The total notional amount outstanding was approximately $334 million at June 30, 2021, at which point the net termination value was nearly $85 million to Allina. Three of the five swaps have collateral posting requirements.
Allina's MNA metro nurses' union contract expires in 2022. Allina renegotiated a new three-year agreement with employees represented by the SEIU in 2021. Nurses at Allina's WestHealth emergency department and urgent care in Plymouth, MN (also represented by the MNA) are conducting a three-day work stoppage, affecting approximately 50 nurses.
Sources of information include audited and unaudited information for Allina Health System and associated supplemental data such as volume, payor mix, and market share.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
VIEW ADDITIONAL RATING DETAILS
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Building industry-leading digital experiences that delivered $1 million in new revenue at Allina Health
As Allina Health revamped its brand image, the organization’s leaders realized the existing digital experience was falling short. The health system needed more intuitive capabilities for delivering the right content and data to all its users, from clinicians to patients to marketers.
That’s when Allina Health called on the proven expertise of West Monroe’s team to:
- Uncover technology gaps hindering user experience
- Innovate and test potential new services rapidly
- Create and continuously enhance a role-centric online experience that better serves providers, patients, and others in the healthcare journey
An Undeniable Approach
West Monroe’s cross-functional team pairs deep industry knowledge with digital chops. Our unique Digital Experience Lab has grown to partner with 4 dedicated product teams at Allina Health that build and support 8 current digital products. Teams can pivot effort quickly to reflect evolving needs and priorities.
- Listening: We have conducted more than 400 surveys and 100 in-person interviews across departments and with patients to uncover the specific obstacles standing in the way of providing or receiving needed care.
- Prototyping better digital touchpoints rapidly in iterative sprints that solve identified problems – for example, an app that makes it easier for doctors to find and connect patients with appropriate in-network referrals. We have completed more than 31 such design sprints.
- Prioritizing usability and personalization with web and mobile experiences tailored to the user’s role within or outside the organization.
- Enhancing digital services experiences continuously.
Our team took Allina Health’s digital experience evolution to the next level with digital-first online assets. Over the course of our relationship, that has included a more unified and individualized web portal for the entire user spectrum, as well as various active or in-development apps or digital concepts:
- Allina Health Account app
- Oncology patient journey concepts
- Healthy Set Go blog
- Provider-to-provider app
- Beginnings app (pregnancy, birth, and beyond)
- Take Heart app (cardiovascular care)
Returns You Can Measure
With West Monroe’s help, Allina Health transformed its digital properties to deliver better user experiences and improve patient outcomes. And it is able to introduce these digital capabilities faster. Today, the organization’s Digital Experience Lab sends new code to production monthly—that used to happen once every 18 months. The results:
- Improved patient care – for example, helping patients find the right care level, see urgent care wait times so they can pick the optimal location and hold their place in line, and prepare properly for procedures.
- Increased revenue – for example, by equipping providers to identify, communicate with, and refer patients to in-network providers, thereby reducing leakage.
- Increased clinician and technician productivity – for example, by reducing the time spent on unbillable encounters so they have more time to spend with patients.
- Reduced costs – for example, improved online scheduling has saved approximately $75,000 per month.
- Increased efficiency – for example, the system has increased online bill paying from 36% to 52%.
- Improved provider and patient satisfaction – for example, by reducing the time to care, delivering more personalized information, or eliminating time-consuming activity.
US non-profit health care system
Allina Health is a not-for-profit health care system based in Minneapolis, Minnesota, United States. Allina Health owns or operates 12 hospitals and more than 90 clinics throughout Minnesota and western Wisconsin. In addition Allina Medical Transportation covers 8 regions and over 80 communities providing medical dispatch, 911 pre-arrival instructions, and emergency and non-emergency ambulance response. Allina Health employed 29,382 employees in 2018. In February 2012, Allina Hospitals and Clinics announced that it was changing its name to Allina Health. Allina Health's new name is designed to reflect a new mission that shifts the emphasis away from places that people go when they are sick and onto disease prevention and personal vitality. On February 9, 2021, a mass shooting and bombing occurred at an Allina Health clinic in Buffalo, Minnesota, leaving four people critically injured and one person killed.
- Abbott Northwestern Hospital, located in Minneapolis, Minnesota
- Buffalo Hospital, located in Buffalo, Minnesota
- Cambridge Medical Center, located in Cambridge, Minnesota
- District One Hospital, Located in Faribault, Minnesota
- Mercy Hospital - Mercy Campus, located in Coon Rapids, Minnesota
- Mercy Hospital - Unity Campus, located in Fridley, Minnesota
- New Ulm Medical Center, located in New Ulm, Minnesota
- Owatonna Hospital, located in Owatonna, Minnesota
- Phillips Eye Institute, located in Minneapolis, Minnesota
- Regina Hospital, located in Hastings, Minnesota
- River Falls Area Hospital, located in River Falls, Wisconsin
- St. Francis Regional Medical Center, located in Shakopee, Minnesota
- United Hospital, located in St. Paul, Minnesota
- Allina Health Clinic
- Aspen Medical Group and Quello Clinic are now Allina Health Clinics
- Abbott Northwestern Center for Outpatient Care Edina, Minnesota
- Abbott Northwestern – Westhealth Plymouth, Minnesota
- Elk Ridge – Elk River, Minnesota
Allina Home Oxygen and Medical Equipment
Allina Home Oxygen & Medical Equipment has provided oxygen, medical supplies and equipment for clients including children, adults and seniors with varying needs.
Allina Home Care
Allina Home Care provides support, knowledge and assistance to help keep patients independent in the comfort of home.
Chronic and advanced illness
Provides services including Care Navigation Help Desk, Advance care planning, Palliative care, Hospice care, & SeniorCare Transitions
Founded in 2003, the Penny George Institute for Health and Healing is the largest health system based integrative medicine center in the United States.
Allina Emergency Medical Services (EMS)
Allina EMS provides a variety of medical transportation services around the state of Minnesota.
Coordinates: 44°56′58″N93°15′38″W / 44.94944°N 93.26056°W / 44.94944; -93.26056
Nurses Return To Work At Plymouth’s WestHealth After 3-Day Strike
MINNEAPOLIS (WCCO) — A group of Twin Cities nurses headed back to work Wednesday morning after a three-day strike.
The 50 nurses work at Allina WestHealth in Plymouth. They’re in a dispute with Allina Health over holiday pay and benefits.
The hospital’s emergency and urgent care services had been closed since Sunday.
A new contract has not yet been agreed upon.
Allina released the following statement Wednesday:
Allina Health is pleased to have our staff back at work and welcoming patients for emergency and urgent care services on our WestHealth campus in Plymouth.
Throughout negotiations, we have offered a comprehensive contract. Our current proposal, which was unanimously recommended by the union’s bargaining team, yet not ratified by its members, includes an immediate wage increase as well as other benefits. The current paid time off benefits offered would continue under a new contract.
Looking forward, we are hopeful the union is ready to come to agreement on a new contract that prioritizes the health needs of the community, while also sustainably recognizing the contributions of our employees.
The Minnesota Nurses Association released the following statement during the strike:
MNA nurses have been negotiating a new contract for months, but Allina has refused to agree to fair pay for holiday work or adequate benefits. Compensating nurses fairly for holiday work is especially critical because understaffing by Allina and other hospital systems has required nurses to work more days and longer hours, including overtime and holidays, as they continue on the frontlines of the COVID-19 pandemic.
Nurses at Allina WestHealth have worked tirelessly to provide critical, urgent care to Minnesotans in the facility’s Emergency Department throughout the pandemic. At a time when Minnesotans need emergency care the most, Allina Health would rather leave patients waiting than grant nurses holiday pay and benefits comparable to other Emergency Departments. Allina has acknowledged that they do not lack the revenue to fairly compensate nurses for their holiday hours but that they believe nurses, who have sacrificed so much over the last two years, do not deserve more.
A fair contract that provides adequate benefits and holiday pay will not only justly compensate the nurses currently working, but it is also essential to attract and retain new talent in the profession. While there is no shortage of nurses who want to work at the bedside, there is a shortage of nurses willing to work under current hospital conditions. A fair contract is an important first step toward ensuring a safe and welcoming workplace.
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Hey, I called out to Kate. - Don't get carried away. This trail will disappear not earlier than in a couple of weeks, and you know that I don't like this. Hit it hurts, but don't disfigure.
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Dug up ground.