Lebanon — A company that acts as a watchdog in financial markets has downgraded the credit of Dartmouth-Hitchcock but said that a further drop is unlikely unless the medical provider dips into reserves or significantly adds to the half-billion dollars of long-term debt already on its balance sheet.

Standard & Poor’s Rating Services cited “balance sheet metrics that are significantly weaker than our expectations … and strained financial performance since fiscal 2014” for lowering its grade on the Lebanon-based medical system to “A” from “A+.”

The downgrade sounded a cautionary note but did not reflect a fundamental change in S&P’s view of the hospital system as a strong player in its sector and region.

“Dartmouth-Hitchcock is a very well-regarded organization,” S&P analyst Jennifer Soule said in an interview.

Volume of care and revenue have grown steadily in recent years, she noted.

But the medical system’s financial performance has lagged, with its operating margin dipping below the institution’s 4 percent target and falling into negative territory in the last 18 months, Soule said. 

“Standard & Poor’s decision to downgrade D-H’s bond rating was not unexpected,” and was driven by the medical system’s recent financial results, D-H spokeswoman Victoria McCandless said in an email.

D-H posted a $9.3 million operating loss in the fiscal year that ended June 30. A year earlier, it posted a net gain from operations of $25.3 million, or 1.8 percent of revenue. That still was lower than the median operating margin for nonprofit health care systems, which S&P put at 2.9 percent that year.

D-H’s fiscal 2015 revenue fell short of projections due to “unplanned surgeon transitions,” S&P said. 

The S&P downgrade, which was dated March 21, showed “the importance of D-H reaching its margin target of 4 percent,” McCandless said.

D-H’s capacity to borrow, invest and pay the tab for medical and related services affects the health of the economy and residents of the Upper Valley. D-H provides medical care to more than 200,000 residents of northern New England and employs thousands.

An important portion of the hundreds of millions of dollars of revenue that D-H collects from private and government-run insurance programs eventually flows back into the pockets of employees and coffers of local businesses.

At S&P, an “A” rating reflects a borrower that has a strong capacity to meet its financial commitments to bond holders but differs from borrowers with higher “AA” or “AAA” ratings by being “somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions,” according to the S&P website. Plus or minus signs “show relative standing within the major rating categories.”

The sometimes controversial credit rater noted that D-H’s ability to repay the bulk of its long-term debt depends on the financial health of its core institutions: Mary Hitchcock Memorial Hospital, a 396-bed facility in Lebanon; and Dartmouth-Hitchcock Clinic, which provides physician services at clinics in New Hampshire and Vermont.

Net assets attributed to those facilities declined to $384.2 million at the end of December from $409.8 million a year earlier. During the quarter that ended Dec. 31, D-H posted $6.7 million in losses, including $3.5 million in losses from operations.

But Soule, the S&P analyst, predicted that D-H would do better financially in the final half of the fiscal year that runs through June 30.

“We anticipate (D-H) will report a positive operating margin at the close of fiscal 2016, largely driven by a significant increase in disproportionate share revenue,” she said.

That revenue is paid by Medicaid, an insurance program in which states partner with the federal government to pay for medical and related care for some people with low income or few assets.

In fiscal 2015, D-H collected $10.2 million in disproportionate share revenue, although that was not enough to cover its tab for New Hampshire’s Medicaid-related 5.5 percent provider tax on gross patient revenue, which totaled $52 million.

That levy — known as the Medicaid Enhancement Tax — was created decades ago as a device in which the hospitals took on no tax liability while they acted as intermediaries to boost the flow of federal dollars into New Hampshire. After changing federal rules left big hospitals with large tax bills, they sued for relief. The 2014 settlement to that lawsuit has eased, but not erased, the financial burden on the hospitals.

Disproportionate share revenue is expected to increase to $46 million during the current fiscal year, and that could boost D-H’s operating margin for the year to 3.6 percent, although it might take more than two years to repair D-H’s damaged balanced sheet, according to S&P.

S&P also lowered the rating of Keene-based Cheshire Medical Center to “A-” from “A.” Cheshire is owned by Dartmouth-Hitchcock but issued its own bonds prior to being acquired by its larger neighbor in March 2015.

Fitch Ratings, another credit grading firm, has not lowered its grade on D-H’s credit. In February 2015, Fitch gave D-H’s credit an “A+” grade, citing its leadership role in experiments to cut unnecessary spending and change how insurers reimburse health care providers, as well as management’s commitment to achieve higher margins.

But, Fitch warned, “a reversal in this trend could lead to negative rating pressure.”

Soule said that a further downgrade by S&P is unlikely unless D-H’s financial performance deteriorates or the medical system dips into its reserves or returns to bond markets without boosting its margins.

Rick Jurgens can be reached at rjurgens@vnews.com or 603-727-3229.