DBRS Confirms McGill University Health Centre at A (high)

DBRS has today confirmed the rating on the Series A Senior Unsecured Debentures (the Debentures) of the McGill University Health Centre/Centre universitaire de santé McGill (MUHC or the Hospital) at A (high). While the trend remains Stable, DBRS is increasingly concerned by the extent of the budget pressures facing MUHC and the evolution of the relationship with the ministère de la Santé et des Services sociaux (MSSS or the Ministry) and the Agence de la santé et des services sociaux de Montréal (the Agency). Notwithstanding, the rating continues to be supported by the essentiality of MUHC to Québec’s health-care system, the substantial level of foundation assets and the strong funding support from the Province of Québec (the Province, rated A (high) with a Stable trend). Located in Montréal, MUHC is Québec’s largest hospital and provides tertiary care to a territory spanning more than half the Province. In 2011-12, the Hospital had a staff of 10,800 and treated over 900,000 patients. With more than 600 researchers and 300 laboratories, MUHC is one of Canada’s most comprehensive university health centres and a strong teaching hospital through its affiliation with McGill University’s Faculty of Medicine.

A study was commissioned by the MSSS in September 2012 in order to evaluate the governance and financial management of MUHC. The findings were detailed in the Baron Committee’s report, which was released late in December 2012. The report detailed several concerns, most notably with respect to certain real estate transactions and the number of overtime hours worked between 2009 and 2012, the latter of which has contributed to per-patient costs in excess of its peers. For fiscal year 2011-12, the Hospital exhibited a budget shortfall of $29.5 million, in line with MUHC’s expectations. The extra $17.2 million was attributable to cost pressures related to volume and patient type. For fiscal year 2012-13, the recurring deficit is estimated by MUHC at approximately $58.2 million, including the $12.3 million accumulated structural deficit and the $8.5 million attributable to the research centre.

The previous board chair resigned late in 2011, and management’s focus, previously diverted by assembling the necessary agreements for the procurement of the new public-private partnership (PPP) hospital at the Glen site (the Glen Campus), has returned to efficient hospital management. Despite the Hospital’s renewed focus on financial prudence, the relationship between MUHC, the Agency and the Ministry has recently become more challenging. In the past, bridge loans from the Agency were sometimes used to offset modest budget deficits and allow MUHC to meet deficit targets. However, it is unlikely that such top-up funding will be available in the foreseeable future, and DBRS anticipates that, going forward, addressing budget shortfalls will principally involve the implementation of cost-cutting measures and internal process realignments. Exacerbating the shortfalls is the requirement to consolidate the research centre into the Hospital’s financials, which has traditionally demonstrated annual deficits. Without impacting service levels, MUHC will see increased pressure to manage costs within an increasingly frugal funding envelope.

Recently, the Hospital’s performance has been inconsistent with its current rating. DBRS sees little further room for the continued deterioration of operating results within the current credit profile and expects that negative rating action could result if the Hospital has not taken concrete steps to reverse recent trends, including the development of a feasible plan to return to balance, by the time of MUHC’s next annual review.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Public Hospitals, which can be found on our website under Methodologies.