Cascade Health Services’ series 2002 and 1995 bonds went in for a checkup, and the credit doctor says they’re healthy.

Poised for fervent growth over the next five to seven years, Cascade Health Services’ (CHS) recently put its $75 million series 2001 bonds on the market. The bonds received a high-investment grade rating. However, as a result of the hospital’s increased debt load, its 1995 series bonds – $9.7 million – were downgraded slightly.

The new bonds will fund a large chunk of the proposed $115 million expansion of CHS – which includes both St. Charles Medical Center and Central Oregon Community Hospital (COCH) in Redmond.

With the Central Oregon region’s population ballooning and also getting older demand for health care services is intensifying. For St. Charles and COCH, it means significantly increasing the size of their campuses. Expansion plans include just about every part of the two campuses, from larger emergency-room quarters to maternity and cancer care.

”There’s nothing to compare it to in our history – it’s that large,” said Todd Sprague, a spokesman for the hospital.

Mimi Park, vice president of New York City-based credit agency Moody’s Investors Service, said CHS’ market position as the dominant provider of health care services in the growing Central Oregon region is the cornerstone of its credit strength.

The hospital’s position is further strengthened by its merger with its closest competitor – Central Oregon Community Hospital – as well as a 30 percent population growth projected over the next 10 years.

Moody’s assigned CHS’ series 2002 bond financing an A1 rating. That rating, according to Moody’s, means CHS’ bonds possess favorable investment attributes and are considered an upper medium-grade obligation.

In conjunction with that rating, Moody’s downgraded CHS’ outstanding series 1995 bonds to A1 from Aa3.

An Aa3 rating, assigned to what are considered high grade bonds, is higher than an A1 rating. An Aa3 is lower than the best bond rating – Aaa – which is assigned to bonds with the smallest degree of investment risk and is generally referred to as ”gilt edged.”

The 1995 series bonds were downgraded, Park said, only because the series 2002 bonds weakened CHS’ cash-to-debt ratio to 91 percent from more than 700 percent considered an exceptionally low amount of debt – at fiscal year end 2001.

”It was a significant increase in debt, which weakened the financial profile,” she said.

Still, to receive such high ratings is not only good news for CHS but is perhaps even unusual news in a time when most hospitals are struggling to weather the storm of managed care and the last vestiges of the Balanced Budget Act (BBA) of 1997.

In an effort to keep the Medicare trust fund from going bankrupt, the federal government passed legislation that slashed Medicare reimbursements by $155 billion over a five-year period. For many hospitals who were already struggling with decreasing revenues, it meant a decline in their credit rating, limiting their access to capital.

”There are a lot of pent up capital needs within our hospital organizations,” Park said. ”These hospitals are deferring their capital needs for better times, trying to stabilize their profitability levels by holding back on capital.”

Since 1998, one year after President Clinton signed the BBA into law, the number of hospitals whose bonds have been downgraded have outnumbered those that have been upgraded. In 2001, 55 hospital bonds that Moody’s rated were downgraded compared to 22 upgrades. In 2000, 56 were downgraded, whereas 12 were upgraded.

In the early 1990s, in anticipation of the financial impact of managed care, St. Charles worked to lower its costs by redesigning its ”care teams” and more specifically tailoring job duties according to its staff experience and qualifications, Sprague said.

By doing so, it was able to stave off layoffs and keep its debt manageably low. The hospital also kept a close eye on how managed care affected health care organizations in Portland and other nearby large cities.

”It has been an intention since 1990 to prepare for worse times in terms of reimbursement, and that preparation has helped us navigate better,” Sprague said.

He added, ”We have a little bit of a lag time between what happens in Portland. If that’s where we’re going to be in two to three years based on the penetration of managed care, what do we need to be doing now?”

Managed care didn’t hit the hospital as hard as anticipated, Sprague said. But then along came the BBA.

”The real factor is can we keep our costs in line, and that has been a challenge,” he said. ”The biggest cost any hospital has is staff, and that has risen faster than revenues.”

While cost pressures have tarnished many hospitals’ credit, there could be on the horizon the financial medicine many health care organizations need.

”Now our outlook is stable for the health care industry in general,” Park said. ”That basically speaks to some of the more recent positive news: growth in volumes, rate increases on the commercial side. We’re (also) seeing Medicare reimbursements after BBA, now at its close.”

Park added that with economists predicting an end to the recession later this year, ”Everybody is back to focusing on operations and core activity.”