New York, December 07, 2012 -- Moody's Rating

Issue: Fixed Rate, Series 2012D; Rating: Aa2; Sale Amount: $72,200,000; Expected Sale Date: 12/17/2012; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Aa2 rating to $72.2 million of Series 2012D fixed rate bonds to be issued by Inova Health System through the Industrial Development Authority of Fairfax County. The rating outlook remains stable. We are also affirming our outstanding Aa2, Aa2/VMIG 1, P-1 and Aa2 / P-1 ratings on Inova's various debt securities. This action affects an aggregate $1.41 million of debt.

Ratings Rationale: The assignment of the Aa2 rating and affirmation of the outstanding Aa2, Aa2/VMIG 1, P-1 and Aa2/P-1 ratings on Inova's various debt securities is attributable to the System's strong market position in a vibrant market, Inova's long track record of effectively addressing operating challenges, consistently conservative approach to debt and investment management which have translated into ample balance sheet resources and exceptional operating performance. Additionally, Inova maintains sufficient daily liquidity for un-remarketed demand debt. The stable rating outlook reflects expectations that performance will continue to translate to an operating and debt profile which will meet or exceed benchmarks at the Aa2 rating level

Strengths

*Distinctly leading market capture, approximately 55%, of a broad and vibrant service area which is characterized by: population growth that exceeds national averages; a diverse and stable economic base with low unemployment, and; a large and growing Federal employment base

*Extensive breadth of tertiary and quaternary clinical services, many of which are exclusive within the Northern Virginia market; Inova accounts for 67% of the licensed beds in Northern Virginia

*Very long track record of exceptional trend of financial performance, with operating cash flow margins that have grown in each of the last seven years, in spite of industry challenges and capital market volatility, reflecting a very disciplined and methodical approach to system operations

*Strong management capabilities evidenced by the System's historical ability to absorb operating challenges and continue to generate well above average operating cash-flow levels, meet or exceed operating budgets, and effectively execute strategies

*Ample and growing liquidity position with $3.3 billion of unrestricted cash and investments equating to 611 days of cash on hand as of September 30, 2012, providing a strong 223% coverage of pro-forma debt

*Debt structure risks are very manageable relative to liquidity with over 650% cash-to-demand debt based on unrestricted cash as of FYE 2011. Giving effect to current refunding issuance and Series 2012A,B and C bonds issued in the summer of 2012, Inova remains modestly leveraged on a pro-forma basis as evidenced by an ample 7.1 times maximum annual debt service coverage and 2.8 times debt-to-cashflow based on FY 2011 performance

*Inova's new partnership with Aetna, establishing Innovation Health plan, a jointly owned health plan serving Northern Virginia, expected to begin in early 2013 creates a controlled platform for risk sharing with a population that is a known quantity ahead of industry and insurance reform; while some initial business risk is apparent the new payment model presents an opportunity for development of a product that draws on both Inova and Aetna's inherent strengths

*Pension plan is fully funded, with a 100% pension funded ratio relative to a projected benefit obligation (PBO) of $652.5 million at FYE 2011 using a 3.8% discount rate and a 5.5% rate of return

*Sufficient daily liquidity, solid treasury management, and appropriate liquidation procedures supporting self liquidity program

*Favorable regulatory environment -- certificate of need and medical malpractice cap

Challenges

*Relatively concentrated geography of market capture with over two-thirds of the System's inpatient hospital discharges originating from Fairfax and Loudoun Counties

*Slowed revenue growth, partly attributable to some Kaiser volume shift (discussed below), as well as industry headwinds which will likely translate into continued top-line pressures and some margin erosion

*Inpatient demand has been soft across system facilities in FY 2010 and FY 2011. The most pronounced decline has been at the flagship facility, Fairfax Hospital, due to Kaiser's shift of some admissions to other area hospitals as well as a shift to observations stays that is consistent with industry trends. Though the shift of the Kaiser lives raises some concern, management reports that the loss of lower end volumes at less favorable rates has been offset by higher end growth

*Extensive capital program which continuously demands substantial strategic and routine investment funded by a combination of cash-flow and fairly regular debt borrowings; planned spending to exceed $1.5 billion through 2014 (including the proceeds of this issuance)

Outlook

The stable rating outlook reflects expectations that performance will continue to translate to an operating and debt profile which will meet or exceed benchmarks at the Aa2 rating level

What could change the rating--UP

Greater geographic dispersion of cash flow sources; healthy revenue growth that translates into continued strengthening of already strong leverage measures; continuation of above average margins

What could change the rating--DOWN

Material departure from current operating performance resulting from fundamental market changes which linger or an unexpected and material increase in debt without commensurate growth in cash and cashflow; significant decline in unrestricted cash

METHODOLOGY

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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Beth I. Wexler VP - Senior Credit Officer Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Lisa Goldstein Associate Managing Director Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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