NEW YORK – Standard & Poor's Ratings Services revised its rating outlook to negative from stable on Salem Hospital Regional Health Services, Ore.'s debt issued by Salem Hospital Facility Authority. At the same time, Standard & Poor's affirmed its 'A+' long-term and underlying ratings (SPURs) and 'AAA/A-1+' and 'AAA/A-2' ratings on Salem Hospital's series 2008B and 2008C variable-rate demand bonds, respectively.

The negative outlook reflects the increased pressure on profitability given a shift in Salem's payor mix due to the economic environment and weaker projected operating performance versus original expectations. However, management is in the process of implementing several cost-reduction initiatives, which should offset the impact of the shift in payor mix.

Credit strengths supporting the rating continue to be Salem's dominant market position in the primary service area (75 percent market share), with projected population growth; successful completion of a new patient tower that opened on time in May 2009 and within budget; and a significant volume increase in the first quarter of fiscal 2010. Added credit strengths include the hospital's solid cash flow with operating EBIDA margins of 10 percent for the first quarter 2010 and 9.1 percent for fiscal 2009, and limited capital spending needs in the near term, which Standard & Poor's believes should allow for liquidity growth.

Standard & Poor's credit concerns include the hospital's adequate balance sheet metrics for the rating level with 76 percent cash to debt and 183 days' cash on hand as of Dec. 31, 2009; depressed operating margins due to increased costs associated with the new facility and continued pressure on profitability due to the shift in payor mix; declining percentage of commercial payors, given the economic environment; and thin maximum annual debt service coverage for the rating level of 2.8x for the first-quarter fiscal 2010 and 2.3x for fiscal 2009 (Sept. 30 year-end).

"The negative outlook is due to the increased pressure on profitability; however, we expect Salem to meet its budgeted operating margin in fiscal 2010 and maintain solid cash flow and liquidity," said Standard & Poor's credit analyst Emily Wong. "The return to a stable outlook will be based on Salem exceeding its budgeted operating performance and successfully managing the impact of the shifting payor mix environment," said Ms. Wong.