13 hospital and health systems hit with credit downgrades, revisions

Here is a summary of recent credit downgrades and outlook revisions for hospitals and health systems going back to the most recent major roundup March 16.

The various downgrades reflect continued operating challenges many nonprofit systems are facing and will likely continue to deal with for some years to come. The most recent downgrades and revisions, which have not been included in any more recent roundups, are listed first.

Baptist Health Care (Pensacola, Fla.): 

BHC had the rating downgraded on a series of its bonds as a reflection of “pressured operating performance and cash flow,” S&P Global said April 19.

As well as typical industry pressures of inflation and labor expenses, the three-hospital system may face further challenge because of a replacement project for its flagship Baptist Hospital that is due to be completed in late 2023.

Beacon Health (South Bend, Ind.): 

Beacon Health System had its outlook revised to negative from stable on “AA-” rated bonds it holds, S&P Global said April 14.

The move reflects weaker operating results and an expectation of increased debt over the near term.

Kuakini Health System (Honolulu): 

Kuakini Health System, which has a “CCC” long-term rating, has been placed on CreditWatch with negative implications, S&P Global said April 14.

The move reflects the system’s sustained operating challenges with no foreseeable major changes and questions about its long-term viability, the agency said, describing the system’s “precarious financial position.”

Baystate Health (Springfield, Mass.): 

Baystate Health had ratings downgraded on specific bonds related to its flagship medical center, S&P Global said April 12.

While ratings were affirmed on other debt, those on others specific to the 780-bed Baystate Medical Center were downgraded to “A” from “A+” as the system’s operating challenges continue into 2023, the agency said.

Penn State Health (Hershey, Pa.): 

Higher-than-expected operating losses have led to Penn State Health being downgraded on a series of bonds from “A+” to “A,” S&P Global said April 6.

Original budgets for the first part of fiscal 2023 targeted a slightly positive full-year operating margin, but data shows a $75 million lower-than-forecasted figure, S&P Global said. Operating income showed a loss of $154.5 million for the six months ending Dec. 31 compared with a $48.8 million loss in all of fiscal 2022.

Legacy Health (Portland, Ore.): 

Legacy Health had its outlook revised to negative from stable amid expectations the eight-hospital system will continue to experience difficult operating conditions and concern it will continue to fail to meet debt obligations, Moody’s said April 5.

The rating on its revenue bonds was affirmed at “A1.” Total debt stands at $738 million.

Providence (Renton, Wash.): 

The 51-hospital system recorded the first of three downgrades in the space of a few weeks March 17 when Fitch Ratings attached an “A” grade to both the system’s default rating and a series of bonds worth approximately $7.4 billion. The outlook for the system is negative due to its higher-than-average debt loads, Fitch said. 

S&P Global then downgraded Providence to the same notch from “A+” March 21 amid higher expenses and an expectation of only a multiyear process of recovery. The outlook for the system was also negative given the steep operating losses that need to be dealt with, S&P said.

Finally, Providence was downgraded by Moody’s on a series of bonds from “A1” to “A2.

Thomas Jefferson (Philadelphia): 

Thomas Jefferson University has undergone a credit downgrade with cash flow margins expected to stay low for “several years,” Moody’s said March 30.

The 18-hospital system, which also operates 10 colleges located primarily on two campuses in Philadelphia, is expected to stabilize its days of cash on hand to about 140, but debt will remain high, Moody’s said. The outlook is stable.

Oaklawn Hospital (Marshall, Mich.): 

The 68-bed community hospital was downgraded to “BBB-” from “BBB” as it reported operating losses due to higher expenses and length of patient stay, Fitch Ratings said March 29.

The downgrade refers both to its default rating and on bonds worth $63.5 million. The outlook is negative.

DCH Health (Tuscaloosa, Ala.): 

The three-hospital system saw its rating on a series of bonds lowered to “A-” from “A” as it continues to suffer operating losses, S&P Global said March 29.

The system’s “deeply negative underlying operations” are unlikely to lead to any substantial improvement in the near future, the agency said.

DCH Health operates a total of 510 staffed beds.

AU Health System (Augusta, Ga.): 

The system, which is being pursued by Marietta, Ga.-based Wellstar Health, was downgraded March 23 amid concern over negative cash flow and that it may breach covenant agreements later this year, Moody’s said.

The downgrade to “B2” from “Ba3” applies to revenue bonds the system holds. The outlook is negative.

PeaceHealth (Vancouver, Wash.): 

“Considerable operating stress” was the driver behind Fitch Ratings downgrading the 10-hospital system March 21.

The downgrade to “A+” from “AA-” applied to both the system’s default rating and on a series of bonds. The outlook is stable.

Management is targeting a return to profitability by fiscal 2026, Fitch noted.

Mercy Iowa City Hospital:

The hospital, part of Des Moines, Iowa-based MercyOne, was downgraded March 16 to “Caa1” from “B1” because of what Moody’s called “severe cash flow deterioration.” The “Caa1” categorization is seen as “substantial risk.”

PeaceHealth cuts 251 jobs

PeaceHealth has eliminated 251 caregiver roles across multiple locations, the Vancouver, Wash.-based health system said in a statement shared with Becker’s on April 26.

PeaceHealth is actively responding to the significant challenges faced by healthcare organizations across the U.S. Comprehensive plans are already underway to recruit additional nurses, ensure patients can return home as quickly as possible and grow the services we know our community members need,” the statement read. 

“As always, we are also adjusting operations and services to reflect changes in our communities and ensure we are being responsible to our healing mission into the future.”

PeaceHealth said affected roles include 121 from Shared Services, which supports its 16,000 caregivers in Washington, Oregon and Alaska. Shared Services include administrative services that support clinical caregivers such as human resources, information technology, marketing and communications, and finance.

The remaining affected roles are “relatively evenly spread across our three networks. In line with our value of respect, we offer comprehensive transitional support consistent with our policies and practices to all impacted caregivers,” the health system said.

PeaceHealth spokesperson Alison Taylor told Becker’s the health system anticipates many affected caregivers will be qualified for the nearly 1,300 open clinical roles across the organization.

In February, PeaceHealth reported a loss of $90.8 million in the six months ending Dec. 31, 2022. The health system was also downgraded in March by Fitch Ratings, which cited the organization’s “considerable operating stress.”

PeaceHealth operates 10 hospitals across Alaska, Oregon and Washington.

Hospitals’ ‘dire’ financial situation, in 4 charts

According to a new report from the  American Hospital Association (AHA), hospitals and health systems are facing significant financial pressures from rising expenses, including for labor, drugs, medical supplies and more. And without increased government support, the organization warns that patients’ access to care could be at risk.

Hospitals continue to see expenses grow, negative margins

In the report, AHA writes that several factors, including historic inflation and critical workforce shortages leading to a reliance on contract labor, led to “2022 being the most financially challenging year for hospitals since the pandemic began.”

According to data from  Syntellis Performance Solutions, overall hospital expenses increased by 17.5% between 2019 and 2022 — more than double the increases in Medicare reimbursements during the same time. Between 2019 and 2022, Medicare reimbursement only grew by 7.5%.

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With expenses significantly outpacing reimbursement, hospital margins have been consistently negative over the last year. In fact, AHA noted that “over half of hospitals ended 2022 operating at a financial loss — an unsustainable situation for any organization in any sector, let alone hospitals.”

So far, this trend has continued into 2023, with hospitals reporting negative median operating margins in both January and February.

A recent analysis also found that the first quarter of 2023 had the largest number of bond defaults among hospitals in over 10 years. 

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Where are hospital expenses increasing?

Between 2019, and 2022 hospital labor expenses increased by 20.8%, a rise that was largely driven by a growing reliance on contract labor to fill in workforce gaps during the pandemic. Even after accounting for an increase in patient acuity, labor expenses per patient increased by 24.7%.

Compared to pre-pandemic levels, hospitals saw a 56.8% increase in the rates they were charged for contract employees in 2022. Overall, hospitals’ contract labor expenses increased by a “staggering” 257.9% in 2022 compared to 2019 levels.

A sharp rise in inflation in recent months has also led to a significant increase in hospitals’ non-labor expenses, particularly for drugs and medical expenses. According to a report by  Kaufman Hall, just non-labor expenses would lead to a $49 billion one-year expense increase for hospitals and health systems.

Since 2019, non-labor expenses have grown 16.6% per patient. Hospitals’ expenses for drugs and medical supplies/equipment have seen similar increases per patient at 19.7% and 18.5%, respectively. Costs of laboratory services (27.1%), emergency services (31.9%), and purchased services, including IT and food and nutrition services, (18%) have also increased significantly per patient. 

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Outside of labor and non-labor expenses, AHA writes that policies from health insurers have also contributed to significant burden among hospital staff and increased administrative costs. Currently, administrative costs account for up to 31% of total healthcare spending — of which, billing and insurance makes up 82%.

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What Congress can do to support hospitals

With the COVID-19 public health emergency ending on May 11, several important hospital waivers and flexibilities will soon end, and “[t]he downstream effects of this will be wide-ranging as hospitals will be faced with a set of additional challenges,” AHA writes.

“Rising costs for drugs, supplies, and labor coupled with sicker patients, longer hospital stays, and government reimbursement rates that do not come close to covering the costs of caring for patients have created a dire situation for hospitals and health systems,” said AHA president and CEO Rick Pollack.

“This is not just a financial problem; it is an access problem.

When healthcare providers cannot afford the tools and teams they need to care for patients, they will be forced to make hard choices and the people who will be impacted the most are patients. We can’t let that happen. Congress and others must act to preserve the care our nation needs and depend on.”

To address these financial challenges and ensure that hospitals are able to continue caring for patients, AHA has suggested several actions Congress could take to support hospitals going forward, including:

  • Enacting policies to support efforts to boost the healthcare workforce and ensure of future pipeline of professionals to combat longstanding labor shortages
  • Rejecting attempts to cut Medicare or Medicaid payments to hospitals, which could further reduce patients’ access to care
  • Encouraging CMS to use its “special exceptions and adjustments” to make retrospective adjustments to account for differences between what was implemented for fiscal year 2022 and what is currently projected
  • Creating a special statutory designation and providing additional support to hospitals that serve historically marginalized communities

“As the hospital field maintains its commitment to care in the face of significant challenges, policymakers must step up and help protect the health and well-being of our nation by ensuring America has strong hospitals and health systems,” AHA writes.

The No. 1 problem keeping hospital CEOs up at night

Workforce problems in U.S. hospitals are troublesome enough for the American College of Healthcare Executives to devote a new category to them in its annual survey on hospital CEOs’ concerns. In the latest survey, executives identified “workforce challenges” as the No. 1 concern for the second year in a row.

Financial challenges, which consistently held the top spot for 16 years in a row until 2021, were listed the second-most pressing concern in the American College of Healthcare Executives’ annual survey.

Although workforce challenges were not seen as the most pressing concern for 16 years, they rocketed to the top quickly and rather universally for healthcare organizations in the past two years. Most CEOs (90 percent) ranked shortages of registered nurses as the most pressing within the category of workforce challenges, followed by shortages of technicians (83 percent) and burnout among non-physician staff (80 percent). 

Here are the most concerning issues hospital CEOs ranked in 2022, along with the score of how pressing CEOs find each issue. 

1. Workforce challenges (includes personnel shortages and staff burnout, among other issues) — 1.8 

2. Financial challenges — 2.8

3. Behavioral health and addiction issues — 5.2 

4. Patient safety and quality — 5.9

5. Governmental mandates — 5.9

6. Access to care — 6.0  

7. Patient satisfaction — 6.6

8. Physician-hospital relations — 7.6

9. Technology — 7.7 

10. Population health management — 8.6

11. Reorganization (mergers and acquisitions, partnerships and restructuring) — 8.7 

Within financial challenges, most CEOs (89 percent) ranked increasing costs for staff and supplies as the most pressing, followed by operating costs (66 percent) and Medicaid reimbursement (63 percent). CEOs are less concerned about price transparency and moving away from fee-for-service.

Seventy-eight percent of CEOs ranked lack of appropriate facilities/programs as most pressing within the category of behavioral health and addiction issues. That was followed by lack of funding for addressing behavioral health and addiction issues (77 percent).

The results are based on a survey administered to CEOs of community hospitals (non-federal, short-term, non-specialty hospitals). ACHE asked respondents to rank 11 issues affecting their hospitals in order of how pressing they are. Results are based on responses from 281 executives.

5 trillion-dollar questions hanging over hospitals

Big questions tend to have no easy answers. Fortunately, few people would say they went into healthcare for its ease.

The following questions about hospitals’ culture, leadership, survival and opportunity come with a trillion-dollar price tag given the importance of hospitals and health systems in the $4.3 trillion U.S. healthcare industry. 

1. How will leaders insist on quality first in a world where it’s increasingly harder to keep trains on time? 

Hospitals and health systems have had no shortage of operational challenges since the COVID-19 pandemic began. These organizations at any given time have been or still are short professionals, personal protective equipment, beds, cribs, blood, helium, contrast dye, infant formula, IV tubing, amoxicillin and more than 100 other drugs. After years of working in these conditions, it is understandable why healthcare professionals may think with a scarcity mindset

This is something strong leaders recognize and will work to shake in 2023, given the known-knowns about the psychology of scarcity. When people feel they lack something, they lose cognitive abilities elsewhere and tend to overvalue immediate benefits at the expense of future ones. Should supply problems persist for two to three more years, hospitals and health systems may near a dangerous intersection where scarcity mindset becomes scarcity culture, hurting patient safety and experience, care quality and outcomes, and employee morale and well-being as a result. 

The year ahead will be a great test and an opportunity for leaders to unapologetically prioritize quality within every meeting, rounding session, budgetary decision, huddle and town hall, and then follow through with actions aligned with quality-first thinking and commentary. Working toward a long-term vision and upholding excellence in the quality of healthcare delivery can be difficult when short-term solutions are available. But leaders who prioritize quality throughout 2023 will shape and improve culture.

2. Who or what will bring medicine past the scope-of-practice fights and turf wars that have persisted for decades? 

It is naive to think these tensions will dissolve completely, but it would be encouraging if in 2023 the industry could begin moving past the all-too-familiar stalemates and fears of “scope creep,” in which physicians oppose expanded scope of practice for non-physician medical professionals. 

Many professions have political squabbles and sticking points that are less palpable to outsiders. Scope-of-practice discord may fall in that category — unless you are in medicine or close to people in the field, it can easily go undetected. But just as it is naive to think physicians and advanced practice providers will reach immediate harmony, so too is it naive to think that aware Americans who watch nightly news segments about healthcare’s labor crisis and face an average wait of 26 days for a medical appointment will have much sympathy for physicians’ staunch resistance to change. 

The U.S. could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, according to the Association of American Medical Colleges. Ideally, 2023 is the year in which stakeholders begin to move past the usual tactics, arguments and protectionist thinking and move toward pragmaticism about physician-led care teams that empower advanced practice providers to care for patients to the extent of the education and training they have. The leaders or organizations who move the needle on this stand to make a name for themselves and earn a chapter or two in the story of American healthcare. 

3. Which employers will win and which will lose in lowering the cost of healthcare? 

Employers have long been incentivized to do two things: keep their workers healthy and spend less money doing it. News of companies’ healthcare ventures can be seen as cutting edge, making it easy to forget the origins of integrated health systems like Oakland, Calif.-based Kaiser Permanente, which dates back to one young surgeon establishing a 12-bed hospital in the height of the Great Depression to treat sick and injured workers building the Colorado River Aqueduct. 

Many large companies have tried and failed, quite publicly, to improve healthcare outcomes while lowering costs. Will 2023 be the year in which at least one Fortune 500 company does not only announce intent to transform workforce healthcare, but instead point to proven results that could make for a scalable strategy? 

Walmart is doing interesting things. JPMorgan seems to have learned a good deal from the demise of Haven, with Morgan Health now making some important moves. And just as important are the large companies paying attention on the sidelines to learn from others’ mistakes. Health systems with high-performing care teams and little variation in care stand to gain a competitive advantage if they draw employers’ attention for the right reasons. 

4. Who or what will stabilize at-risk hospitals? 

More than 600 rural hospitals — nearly 30 percent of all rural hospitals in the country — are at risk of closing in the near future. Just as concerning is the growing number of inner-city hospitals at increased risk of closure. Both can leave millions in less-affluent communities with reduced access to nearby emergency and critical care facilities. Although hospital closures are not a new problem, 2022 further crystalized a problem no one is eager to confront. 

One way for at-risk hospitals to survive is via mergers and acquisitions, but the Federal Trade Commission is making buying a tougher hurdle to clear for health systems. The COVID-19 public health emergency began to seem like a makeshift hospital subsidy when it was extended after President Joe Biden declared the pandemic over, inviting questions about the need for permanent aid, reimbursement models and flexibilities from the government to hospitals. Recently, a group of lawmakers turned to an agency not usually seen as a watchdog for hospital solvency — HHS — to ask if anything was being done in response to hospital closures or to thwart them. 

Maintaining hospital access in rural and urban settings is a top priority, and the lack of interest and creativity to maintain it is strikingly stark. As a realistic expectation for 2023, it would be encouraging to at least have an injection of energy, innovation and mission-first thinking toward a problem that grows like a snowball, seemingly bigger, faster and more insurmountable year after year.

Look at what Mark Cuban was able to accomplish within one year to democratize prescription drug pricing. Remember how humble and small the origins of that effort were. Recall how he — albeit being a billionaire — has put profit secondary to social mission. There’s no one savior that will curb hospital closures in the U.S., but it would be a good thing if 2023 brought more leadership in problem-solving and matching a big problem with big energy and ideas. 

5. Which hospital and health system CEOs will successfully redefine the role? 

Many of the largest and most prominent health systems in the country saw CEO turnover over the past two years. With that, health systems lost decades of collective industry and institutional knowledge. Their tenure spanned across numerous milestones and headwinds, including input and compliance with the Affordable Care Act, the move from paper to digital records, and major mergers and labor strikes. The retiring CEOs had been top decision-makers as their organizations met the demands of COVID-19 and its consequences. They set the tone and had final say in how forcefully their institutions condemned racism and what actions they took to address health inequities. 

To assume the role of health system CEO now comes with a different job description than it did when outgoing leaders assumed their posts. Many Americans may carry on daily life with little awareness as to who is at the top of their local hospital or health system. The pandemic challenged that status quo, throwing hospital leaders into the limelight as many Americans sought leadership, expertise and local voices to make sense of what could easily feel unsensible. The public saw hospital CEOs’ faces, heard their voices and read their words more within the past two years than ever. 

In 2023, newly named CEOs and incoming leaders will assume greater responsibility in addition to a fragile workforce that may be more susceptible to any slight change in communication, transparency or security. They will need to avoid white-collar ivory towers, and earn reputations as leaders who show up for their people in real, meaningful ways. Healthcare leaders who distance themselves from their workforce will only let the realistic, genuine servant leaders outshine them. In 2023, watch for the latter, emulate them and help up-and-comers get as much exposure to them as possible. 

2022 Was Hospitals’ Worst Financial Year in Decades, But 2023 Won’t Be Much Better

https://medcitynews.com/2023/01/2022

Financial analysts have said that 2022 may have been the worst year for hospital finances in decades. This year looks like it will be yet another year of financial underperformance, with rural providers in especially dire circumstances. 

What’s driving this bleak financial reality? It’s “primarily an expense story,” said Erik Swanson, a senior vice president at Kaufman Hall‘s data analytics practice.

“Growth in expenses has vastly outpaced growth in revenues — since pre-pandemic levels since last year, and even the year prior — such that margins are ultimately being pushed downward. And hospitals’ median operating margin is still below zero on a cumulative basis,” he declared, referring to 2021 and 2020. 

Here’s some context about how dismal this situation is: Even in 2020, a year in which hospitals saw extraordinary losses during the first few months of the pandemic, they still reported operating margins of 2%.

What’s even more disconcerting is that hospitals are underperforming financially pretty much across the board, Swanson said.

For example, the financial reports for the country’s three largest nonprofit health systems — AscensionCommonSpirit Health and Trinity Health — revealed they are all struggling. Ascension reported a $118.6 million loss in the third quarter of 2022, CommonSpirit posted a $227 million loss, and Trinity posted a $550.9 million loss.

Even Kaiser Permanente, one of the country’s largest health systems with an integrated delivery model, reported a $1.5 billion loss for the third quarter of 2022.

Rural hospitals are in even worse shape, but more on that below.

Other hospitals have been forced to shutter service lines to offset these financial losses. Some are also turning to integration and consolidation.

For example, Hermann Area District Hospital in Missouri said last month that it is seeking a “deeper affiliation” with Mercy Health or another provider. This announcement came after the hospital eliminated its home health agency as a cost-cutting measure. In December, the hospital projected a loss of $2 million for 2022.

We can also look at the mega-merger between Atrium Health and Advocate Aurora Health, which was completed last month. The deal, which is designed for cost synergy, creates the fifth-largest nonprofit integrated health system in the U.S. 

The merger was finalized one day after North Carolina Attorney General Josh Stein expressed concern about how the deal could impact rural communities. He said that while he didn’t have a legal basis within his office’s limited statutory authority to block the deal, he was worried that it could further restrict access to healthcare in rural and underserved communities.

Stein brings up an extremely valid concern. Rural hospitals’ dismal financial circumstances are becoming more and more worrisome — in fact, about 30% of all rural hospitals are at risk of closing in the near future, according to a recent report from the Center for Healthcare Quality and Payment Reform (CHQPR).

A crucial reason for this is that it is more expensive to deliver healthcare in rural areas — usually because of smaller patient volumes and higher costs for attracting staff. Another factor is that payments rural hospitals receive from commercial health plans isn’t enough to cover the cost of delivering care to patients in rural areas, said Harold Miller, CEO of CHQPR. 

“Many people assume that private commercial insurance plans pay more than Medicare and Medicaid. But for small rural hospitals, the exact opposite is true,” he said. “In many cases, Medicare is their best payer. And private health plans actually pay them well below their costs — well below what they pay their larger hospitals. One of the biggest drivers of rural hospital losses is the payments they receive from private health plans.”

In Miller’s view, rural hospitals perform two main functions: taking care of sick people in the hospital and being there for people in case they need to go to the hospital. 

To fulfill the latter job, rural hospitals must operate 24/7 emergency rooms. These hospitals get paid when there’s an emergency, but not when there isn’t — even though the hospital is incurring costs by operating and staffing these units.

“Rural hospitals have a physician on duty 24/7 to be available for emergencies. But they don’t get paid for that by most payers. Medicare does pay them for that, but other payers don’t. If the hospital is doing two different things, we should be paying them for both of those things. Hospitals should be paid for what I refer to as ‘standby capacity,’” Miller said.

He bolstered his argument by pointing to these analogies: Do we only pay firefighters when there’s a fire? Do we only pay police officers when there’s a crime?

It’s also important to remember that rural hospitals are in the midst of transitioning to a post-pandemic environment, now without the pandemic-era financial assistance they received from the government, said Brock Slabach, chief operations officer at the National Rural Health Association

“Rural providers are looking to move into the future without the benefit of those extra payments. And they’re in an environment of really high inflation. It’s over 8%, and for some goods and services in the healthcare sector, that’s going to be over 20% in terms of increased prices. Wages and salaries have also gone up significantly. But patient volumes have maintained below average or average. That all presents a huge challenge,” Slabach said.

Rural providers across the country are dealing with the stressors Slabach described and clamoring for more government help. For example, the Michigan Health & Hospital Association sought more money from the state last month after having to take 1,700 beds offline.

Many rural hospitals can’t escape their fate. From 2010 to 2021, there were 136 rural hospital closures. There were only two closures in 2021, and Slabach said 2022 produced a similarly low number. But these low totals are due to government relief, he explained. Slabach said he’s expecting an increase in rural hospital closures in 2023.

When a rural hospital closes, it means community members have to travel far distances for emergency or inpatient care. Miller pointed out another problem: in many rural communities, the hospital is the only place people can go to get laboratory or imaging work done. The hospital might also be the only source of primary care for the community. Shuttering these hospitals would be a massive blow to rural Americans’ healthcare access.

In the face of these potentially devastating blows to patient access, financial analysts’ outlook is bleak. 

Higher inflation and costly labor expenses will continue to have negative effects on hospitals — both rural and urban — in 2023, according to an analysis from Moody’s. Expenses will also continue to increase due to supply chain bottlenecks, the need for more robust cybersecurity investments and longer hospital stays due to higher levels of patient acuity.

All of this doom and gloom begs the question — are any hospitals doing well financially?

The answer is yes, a select few. Let’s look at the three largest for-profit health systems in the nation — Community Health SystemsHCA Healthcare and Tenet Healthcare. As of 2020, these three public health systems accounted for about 8% of hospital beds in the U.S. 

These three systems all had positive operating margins for the majority of the pandemic, including most recently in the third quarter of 2022.

Large public health systems have shareholders to report to and stock prices to worry about. Does this mean they’re more likely to deny care to patients who can’t afford it while other hospitals pick up the slack?

Slabach said it’s tough to say.

“Obviously, hospitals try to mitigate their exposure to risk when it comes to taking care of patients. Most hospitals do a really good job of providing services and care to people who don’t have insurance or don’t have the means to pay. But that gets stressed in this current financial environment. So indeed, there may be instances where what you suggested might happen, but it’s not because they want to deny services or deny care. It’s because they have a bigger picture they have to maintain,” Slabach said.

And the big picture involving dollar signs for hospitals looks pretty bleak in 2023.

The dire state of hospital finances (Part 1: Hospital of the Future series)

About this Episode

The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.

In Part 1 of Radio Advisory’s Hospital of the Future series, host Rachel (Rae) Woods invites Advisory Board experts Monica WestheadColin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.

Links:

As we emerge from the global pandemic, health care is restructuring. What decisions should you be making, and what do you need to know to make them? Explore the state of the health care industry and its outlook for next year by visiting advisory.com/HealthCare2023.

High labor costs, inflation make healthcare outlook negative, Moody’s says

Sustained high labor expenses and inflationary pressures will continue to affect the healthcare industry in 2023, keeping the outlook for nonprofit hospital systems negative, Moody’s said in a Dec. 7 report.

In addition to such pressures, persistent COVID-19 surges, supply chain disruptions and the need for continued cybersecurity investments will also increase expenses, the report said. And while operating revenue is expected to modestly improve next year, the ending of federal Coronavirus Aid, Relief and Economic Security Act funding, net Medicare cuts and the end of the public health emergency will negatively affect hospital revenues, Moody’s said.

“This level of operating cash flow production will likely prove insufficient over the long term to enable adequate reinvestment in facilities, maintain investment in programs, or support organizational growth — key considerations that drive our negative outlook,” said Brad Spielman, vice president, senior credit officer for Moody’s.

Some of the less well-funded healthcare systems could even face breaches of covenant amid such a challenging backdrop, Moody’s warned. Such covenants typically refer to issues like days of cash on hand or minimum coverage of debt.

Management in such challenged systems have taken measures to mitigate the danger of such breaches, the report said. These include liquidating investments and drawing on lines of credit as well as refinancing debt, an unfavorable option in the current economic situation.

The present interest-rate environment, however, currently makes such a move relatively costly,” the report noted.

The Moody’s report follows quickly on the heels of a similar one from Fitch Ratings Dec. 1 that highlighted the “formidable challenge” of high labor expenses and inflationary pressures facing the industry.

A rough year so far for health system finances

https://mailchi.mp/b1e0aa55afe5/the-weekly-gist-october-7-2022?e=d1e747d2d8

As everyone in our industry knows, sluggish volumes amid persistently rising costs, especially for labor, have sent health system margins into a downward spiral across 2022. Using the latest data from consultancy Kaufman Hall, the graphic above shows that by the end of this year, employed labor expenses will have increased more than all non-labor costs combined. 

While contract labor usage, namely travel nursing, is declining, the constant battle for nursing talent means travel nurses are still a significant expense at many hospitals. Through the first six months of this year, over half of hospitals reported a negative operating margin, and the median hospital operating margin has dropped over 100 percent from 2019. 

Larger health systems are not faring better: all five of the large, multi-regional, not-for-profit systems we’ve highlighted below saw their operating margins tumble this year, with drops ranging from three points (Kaiser Permanente) to nearly seven points (CommonSpirit Health and Providence). 

While these unfavorable cost trends have been building throughout COVID, health systems now have neither federal relief nor returns from a thriving stock market to help stabilize their deteriorating financial outlooks. 

Health system boards will tolerate negative margins in the short-term (especially given that many have months’ worth of days cash on hand), but if this situation persists into 2023, pressure for service cuts, layoffs, and restructuring will mount quickly. 

Moody’s downgrades Envision Healthcare, says bankruptcy possible

https://www.healthcarefinancenews.com/news/moodys-downgrades-envision-healthcare-says-bankruptcy-possible?mkt_tok=NDIwLVlOQS0yOTIAAAGHIoNXD3RHJX9565s0VyIQfY4Uc14busfvrByxC5bYAOaGJlhBG7u8IwXVfkB87U6Jjbirffa4zrcOIdYpH9jOgLhMCdv-mgKhDKgBYygB

Envision will see weak liquidity over the following 12 to 18 months, and its $1.4B cash reserve will likely run dry by the end of next year.

Physician staffing company Envision Healthcare is struggling financially, and these struggles are reflected in a Moody’s Investors Service credit rating downgrade, which took into account ongoing labor pressures and a decline in volumes linked to the COVID-19 pandemic.

According to Moody’s, Envision will see weak liquidity over the following 12 to 18 months, and its $1.4 billion cash reserve will likely run dry by the end of next year. Moody’s said bankruptcy or restructuring is likely in the cards, and its Corporate Family Rating (CFR) has been downgraded from C to Caa3.

The rating action follows a series of transactions including restructuring of Envision’s senior secured credit facilities, and issuing a new revolving credit facility in July 2022 and other debt in April 2022 at its subsidiary, AmSurg. Moody’s deemed Envision’s transactions to be a distressed exchange, as the loans were exchanged at a price below par. That’s a default under Moody’s definition.

Envision’s capital structure is unsustainable, the rating agency said. Recovery rates for much of the company’s debt will be low. Moody’s expects operating performance will continue to deteriorate due to ongoing labor pressures within the industry, as well as rising interest rates that will cause interest expense to nearly double. 

The refinancing has not materially reduced debt, and while the maturities have been extended, Envision remains at risk of being unable to service its debt.

WHAT’S THE IMPACT

There are some factors in play that mitigate some of the risks. Envision has considerable scale and market position as one of the largest physician staffing outsourcers in the country, said Moody’s. The company has strong product diversification within its physician staffing and ambulatory surgery center segments.

However, continuing business pressures and increased interest expense will cause Envision’s free cash flow to be significantly negative in 2022 and beyond. 

When assigning the new ratings, Moody’s considered the expected loss on the Envision debt, which the Rating Agency expects will be significant. Moody’s noted that to the extent that there is asset recovery on the Envision business, the share of proceeds to the term loans will be applied to the Envision senior secured first out term loan before the other debt. But it’s expected that there will be material losses.

The outlook is stable for both Envision and the AmSurg subsidiary. Moody’s expects the company to remain distressed and there is a heightened risk of default given the weak liquidity and risks surrounding the ongoing sustainability of the business.

THE LARGER TREND

Envision operates an extensive emergency department, hospital, anesthesiology, radiology and neonatology physician outsourcing segment. The company also operates more than 250 ambulatory surgery centers in 34 states, and is owned by private equity firm KKR. Revenues for the period ending June 30 were about $7 billion.

Although it’s unlikely in the near term, a substantial improvement in Envision’s liquidity position –  including refinancing of the existing debt – would be needed to support an upgrade. Envision would also need an improvement in its operating performance, Moody’s said.

Earlier this month, Envision filed a lawsuit against UnitedHealthcare over the insurer’s denied claims, sparking a countersuit from UHC, which claimed Envision fraudulently upcoded claims for services provided to UHC members.

UHC removed Envision from its network last year, claiming the firm’s costs did not reflect fair market rates. According to Envision’s lawsuit, UHC denied about 18% of submitted commercial claims – a number that swelled to 48% of all claims after Envision’s removal from UHC networks, the firm said. And for the highest-acuity claims, Envision is accusing UHC of denying 60% of those claims.

Meanwhile, in June, physicians at Corona Regional Medical Center and Temecula Valley Hospital in California threatened to leave the hospitals if for-profit owner Universal Health Services changes the staffing management firm to Envision, according to an emergency room doctor who heads the hospitals’ current staffing firm, Emergent Medical Associates (EMA).
Physicians objected to Envision citing concerns of lower pay and staffing levels leading to lower quality of care.