A national health-care financier whose own finances have been questioned by credit-rating agencies has been shortchanging the District's Greater Southeast Community Hospital, which depended on it for cash to pay its bills, the hospital said yesterday.
In recent days, Fitch Ratings and Moody's Investors Service downgraded bonds issued by National Century Financial Enterprises subsidiaries because they were not sufficiently backed by required cash reserves. The Dublin, Ohio, company buys "accounts receivables" from hundreds of hospitals, including Greater Southeast, and then sells bonds based on the flow of payments from insurers.
In a memo to hospital vendors yesterday, Ronald O. Davis, Greater Southeast's chief financial officer, said: "For a period of time, the hospital has not received the funding to which it believes it was entitled under the NCFE program. This has inhibited the hospital's ability to make regular payments to its creditors." The downgrade "has further impacted its [NCFE's] ability to fund the hospital," the memo continued.
Hospital officials said that in recent months the hospital experienced persistent underpayments from NCFE and grew concerned. The memo said the hospital would now ask payers, such as health insurers and the federal government Medicare and Medicaid programs, to pay it directly.
NCFE officials didn't return calls seeking comment. They issued a statement recently, saying they would "continue to work with Moody's, Fitch, investors, and the [bond] trustee to resolve any concerns that currently exist."
Signs of trouble at National Century have been building for a while. Two years ago, the company faced scrutiny by ratings services after anonymous allegations were made that it was misallocating money. The investigations did not substantiate the allegations, so the ratings services continued to give high marks to the NCFE bonds.
In May, new indications emerged. National Century seemed to be having difficulty selling bonds, a primary source of capital to fund new purchases of hospital receivables. Fitch indicated the triple-A-rated bonds from two trusts, called NPF VI and NPF XII, might face a downgrade. That downgrade occurred in July, when Fitch questioned the capitalization of the trusts, the apparent flagging performance of the company and the lack of communication about its business activity.
Moody's detected more problems last week, when it discovered National Century had used reserves, maintained in a trust account to buffer the complex financial transactions, to buy new receivables. In downgrading the bonds, Moody's said "this rating action reflects Moody's concern about NCFE's financial stability."
Jay H. Eisbruck, a senior vice president at Moody's, said the company has not sold bonds to raise capital for new deals since May. Without that cash, it cannot fund new growth and take on new hospitals, he said. Yesterday, Moody's officials huddled to assess the impact on investors, the hospital industry and themselves.
Eisbruck said it's very unusual to see highly rated bonds serviced by a company facing potential default. "We are continuing our investigation of the current situation," he said. "We have had numerous conversations with them over the last few days."
It remains unclear how many hospitals are experiencing a credit crunch as a consequence of National Century's troubles. One person familiar with the company said it stopped buying receivables from hospitals -- in effect, providing lines of credit -- several days ago. This person, who declined to be named, said the company claims that this week it is again providing financing to hospitals.
Fitch and Moody's played down the possibility of any widespread fallout from National Century's troubles. But they said it could squeeze already struggling hospitals -- especially those in rural and urban areas -- that have come to rely on the company's short-term cash infusions to keep them afloat.
M. Craig Kornett, a senior director of health-care rating at Fitch, said only a small fraction of the hospitals he tracks use receivables-financing. Those that depend on National Century, the largest in the sector, can still turn to a handful of other sources of financing.
The trouble will play an even smaller role in the asset-backed securities market, according to Fitch Group Managing Director Douglas Murray. The bonds serviced by National Century's trusts, about $3.35 billion in all, form a minuscule part of the trillion-dollar asset-backed-securities market. "It's kind of a minimal impact," he said.