New London — Standard & Poor’s has lowered Lawrence + Memorial Healthcare's debt rating from “A-“ to “BBB+” in response to “weaker than expected system operating performance,” but characterized the hospital’s financial health as “developing” in recognition of the positive impact of the potential affiliation with the Yale-New Haven Health System.

S&P, in the announcement Friday, said the downgrading reflects “the increasing burden of the Connecticut state hospital tax but also volume issues and ongoing losses in the physician group.” 

But the rating agency acknowledged that L+M has maintained its dominance in its market share.

In 2014 and 2015, L+M paid about $18 million in state hospital taxes.

The physician group referred to by S&P is the L+M Medical Group, a hospital-affiliated organization of about 70 doctors.

S+P said the “developing” outlook “reflects our opinion that there are credit factors that could determine upward or downward rating potential."

“We believe that there is potential for benefits from an increased relationship with Yale-New Haven Health System, expected improvement in operating performance, and maintenance of the strong business position based on management’s initiatives,” S&P said in a news release.

Bruce Cummings, president and chief executive officer of L+M, said the rating changes mean L+M will pay a higher interest rate on current bonded debt and on its line of credit.

L+M is making payments on about $100 million in bonded debt, according to Seth Van Essendelft, chief financial officer and vice president of support services for the hospital.

“Borrowing will be more expensive,” Cummings said.

L+M is negotiating with its banks, and the full impact is not yet clear, he said.

“There will be a cost,” he said. “We don’t know what that will be yet.”

The downgrading further demonstrates the need for L+M to affiliate with Yale-New Haven to achieve economies of scale and grow services, Cummings said.

An application for the affiliation was submitted to state regulators last year but is in limbo after Gov. Dannel P. Malloy declared a moratorium on hospital mergers and affiliations until a panel completes recommendations to reform the process.

Van Essendelft said Tuesday that financial pressures that factored into the downgrading included decreased inpatient volumes, higher percentages of patients with Medicaid coverage — which covers less than 50 percent of the cost of care — and increasing competition from freestanding surgery and imaging centers, as well as the state hospital tax.

S&P also considered L+M’s current “cash on hand” of about $138.5 million to be below the optimum level for its size and recommended that it should be $150 million to $175 million, he said.

“This could discourage us from taking out any new debt,” Van Essendelft said. “Yes, there is a long list of things we intend to do and would like to do, but we may be putting some things on hold."

"But if we can affiliate with Yale, that would give us the scale and scope we would need to continue to invest in the right things,” he said.

j.benson@theday.com