The potential effect of increases in professional and general liability claims, rising labor costs and the volatile reimbursement rate environment on Mariner Health Care have been incorporated into Moody's Investors Service 's assignment of a Ba3 rating to the company's new $220 million credit facility. These are the three largest factors affecting Mariner and the entire industry in general, explained William Lee , Moody's associate analyst.
There is concern that industry-wide increases in professional and general liability claims, with the average cost per bed rising rapidly since 2002, could pressure margins. But Lee noted that Mariner's trends in this area have been stable. Labor expenses have been rising at a rate higher than inflation and increases in reimbursements from third party payors, notes Moody's. Nursing shortages also continue to be a factor. On the reimbursement front, Lee described the current rate environment as "more benign." Mariner's performance will be supported by recent Medicare reimbursement increases of 6.26%. These increases will give the company about $24 million in EBITDA. Lee cautioned that future trends for Medicare reimbursement are uncertain. "It really depends on political climate," he said.
On the positive side, Mariner has been focusing on standardization, cost cutting and process improvement that could offset potential increases in expenses. The company has also been selling non-core and under-performing assets, using proceeds to reduce its debt by close to $100 million. The sale of 20 Florida skilled nursing facilities for $86 million allowed the company to direct about $52.5 million to repay its existing term loan.
The new ratings reflect Mariner's high leverage. The company's current debt-to-EBITDA multiple is around four times and the adjusted debt-to-EBITDAR is approximately five times. Despite increases in cash flow from operations, free cash flow will be minimal due to high capital expenditures over the next year. Calls to Michael Boxer , Mariner's cfo, were referred to a spokeswoman, who did not respond to questions by press time.