S&P lowers Queen’s
Health bond rating

A projected $17.3 million
operating loss leads to
the downgrading

By Russ Lynch
Star-Bulletin

A leading bond-rating service has lowered its opinion of Queen's Health System financing, citing a Queen's estimate that it will report a $17.3 million operating loss for the fiscal year that ended June 30.

Standard & Poor's now has an AA-minus rating, down one step from AA, on about $120 million in state revenue bonds issued to finance Queen's. A lower credit rating can lead to higher interest costs for future financing.

"If profitability doesn't improve in the near term, the rating will likely fall into the single-A category," S&P's office in San Francisco said yesterday in a statement.

Still, S&P listed some positive factors that are still keeping Queen's near the top of its rating structure, which starts at AAA.

Queen's, operator of two hospitals as well as four outpatient clinics and six health plans, has a leading position in Hawaii health care, with 27 percent of patient admissions, S&P said.

The raters also said Queen's has a solid balance sheet, with cash equal to 90 percent of its debt, and they noted that it gets continued support from a "financially strong foundation," a reference to the historic Queen Emma Foundation.

S&P also said Queen's has good income from its investments. Queen's said when that income is included it expects to report an $8 million net profit for fiscal 1998. That, however, will be down 43 percent from the $14 million net it reported for 1996-97. S&P said its outlook remains negative because of serious challenges facing management.

While hospital admissions remain stable, outpatient and emergency visits in the past year were both below projections, S&P said. In addition the Blue Cross/Blue Shield plans, which produce about 20 percent of Queen's total patient revenues, plan to reduce what they pay to Queen's in the future.

The estimated loss from operations for the past fiscal year was higher than S&P had originally been told, because in preparing its estimates for the raters Queen's twice included the same $8.5 million income item, putting it in two different parts of the accounting.

Miscalculating that amount, a negotiated payment from Blue Cross/Blue Shield, led to an "unbudgeted" loss, said S&P, which also described the miscalculation as "improper accounting."

Joel Kennedy, a Queen's spokesman, said today that Queen's believes S&P wrongly characterized that mistake.

"It was an error in projections provided to S&P at the time they were looking at us to do the rating," Kennedy said.

When Queen's looked through the numbers again and realized the mistake had been made, it was corrected and S&P was notified, he said. It was not an error in the Queen's official financial accounting, only in the estimate it gave S&P, he said.

Queen's in March announced it would cut 160 jobs and Kennedy said that so far 30 have been cut.