Nonprofit hospitals’ median financial metrics showed improvement last year, but Fitch Ratings is projecting declines for next year and beyond.
The credit rating agency analyzed 2021 audited data and reported that “AA” rated hospital medians showed a 20 percent increase in cash to adjusted debt. “BBB” rated health systems had an 8 percent increase.
“The deceptively strong numerical improvements over prior years’ medians are less a sign of sector resiliency and more a cautionary calm before the storm,” Fitch Ratings senior director Kevin Holloran said in the Aug. 18 report. “Additional expenses, primarily labor, have become part of the permanent fabric of hospital operations, that when combined with ongoing incremental challenges will exert tremendous pressure on providers through calendar 2022 and beyond.”
Fitch predicts hospital medians will flip this time next year due to inflationary pressures, a challenging operational start to 2022 and additional omicron sub-variants.
Fitch also highlighted staffing as a concern for hospital medians.
“We are likely two years before some level of ‘normal’ returns to the sector,” Mr. Holloran said in the report. “For many hospitals, their ‘value journey’ will be on temporary hold until expenses stabilize and become more predictable.”
ChristianaCare signed a letter of intent in February to acquire Crozer Health from Prospect Medical Holdings. The health systems announced Aug. 18 that the deal will not move forward.
Wilmington, Del.-based ChristianaCare and Los Angeles-based Prospect Medical Holdings said significant changes in the economic landscape since the letter of intent was signed in February impacted the ability of the deal to move forward.
“Both organizations worked very hard to reach a final agreement and have significant respect for each other, and remain committed to caring for the health of those in Delaware County,” ChristianaCare and Prospect Medical Holdings said in a joint news release.
Springfield, Pa.-based Crozer Health includes four hospitals and was acquired by Prospect Medical Holdings in 2016.
Here are eight health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service.
1. Advocate Aurora Health has an “AA” rating and stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said.
2. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base.
3. Lincoln, Neb.-based Bryan Health has an “AA-” rating and stable outlook with Fitch. The health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments.
4. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics and a leading market position and expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic.
5. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said.
6. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The health system has a consistently strong operating cash flow margin and ample balance sheet resources, Moody’s said. Inova’s financial excellence will remain undergirded by its favorable regulatory and economic environment, the credit rating agency said.
7. Salt Lake City-based Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will give Intermountain greater geographic reach.
8. UnityPoint Health has an “AA-” rating and stable outlook with Fitch. The Des Moines, Iowa-based health system has strong leverage metrics and cash position, Fitch said. The credit rating agency expects the health system’s balance sheet and debt service coverage metrics to remain robust.
Credit rating downgrades for several hospitals and health systems were tied to capital expenditures and cash flow issues in recent months.
The following six hospital and health system credit rating downgrades occurred since May:
Doylestown (Pa.) Hospital — lowered in June from “Ba1” to “Ba3” (Moody’s Investors Service) “The downgrade to Ba3 reflects Doylestown Hospital’s … significant and recent decline in operating performance and unrestricted cash reserves through fiscal 2022, which have materially reduced headroom to the days cash on hand covenant (100 days) and increases the risk of an event of default and immediate acceleration as soon as June 30, 2022, a governance consideration under our ESG framework,” Moody’s said.
Jupiter (Fla.) Medical Center — lowered in June from “BBB+” to “BBB” (Fitch Ratings) “The ‘BBB’ rating reflects JMC’s increased leverage profile with the issuance of $150 million in additional debt to fund various campus expansion and improvement projects,” Fitch said. “While favorable population growth in the service area and demonstrated demand for services in an increasingly competitive market justify the overall strategic plan and project, the additional debt weakens JMC’s financial profile metrics and increases the overall risk profile.”
Memorial Health System (Marietta, Ohio) — lowered in July from “BB-” to “B+” (Fitch Ratings) “The downgrade of the IDR to ‘B+’ reflects MHS’s weak net leverage profile through Fitch’s forward-looking scenario analysis given stated growth and spending objectives,” Fitch said. “While operating performance has stabilized over the past three years … and reflects cost efficiency strategies and pandemic relief funding, improved cash flow funded higher levels of capital spending in fiscals 2020 and 2021.”
ProMedica (Toledo, Ohio) — lowered in May from “BBB-” to “BB+” (Fitch Ratings) “The long-term ‘BB+’ rating and the assigned outlook to negative on ProMedica Health System’s debt reflects the system’s significant financial challenges as result of continued pressure of the coronavirus pandemic and escalating expenses, with ProMedica reporting a $252 million operating loss that follows several years of weak performance,” Fitch said.
San Gorgonio Memorial Healthcare District (Banning, Calif.) — lowered in May from “Ba1” to “Ba2” (Moody’s Investors Service) “The downgrade to Ba2 reflects the district’s tenuous cash position and weak finances that have contributed to difficulty in securing a bridge loan financing for liquidity needs pending the delayed receipt of approximately $8 million to $9 million in intergovernmental transfers beyond the end of the fiscal year,” Moody’s said.
South Shore Hospital (South Weymouth, Mass.) — lowered in June from “BBB+” to “BBB” (Fitch Ratings) “The downgrade to ‘BBB’ reflects SSH’s track record of very weak operating performance over the last four fiscal years, exacerbated by staffing shortages and other pandemic-related challenges, which are stymying the system’s efforts towards an operational turnaround,” Fitch said.
Citing more severe than expected macro headwinds, Fitch revised its sector outlook for nonprofit hospitals and health systems to “deteriorating” Aug. 16.
Nonprofit hospitals have been hamstrung by labor and broader macro inflationary pressures that “are rendering the sector even more vulnerable to future stress,” Fitch senior director Kevin Holloran said in an Aug. 16 news release. Investment losses have also contributed to a rockier 2022 than anticipated, and operating metrics are down significantly compared to last year.
“While severe volume disruption to operations appears to be waning, elevated expense pressure remains pronounced,” Mr. Holloran said. “Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022, and likely well beyond.”
Many nonprofit hospitals and health systems are expected to violate debt service coverage covenants this year, according to the news release.
The Inflation Reduction Act is law. But that doesn’t mean major health care interests are done testing their lobbying clout. Many are already lining up for year-end relief from Medicare payment cuts, regulatory changes and inflation woes.
The big picture: Year-end spending bills often contain health care “extenders” that delay cuts to hospitals that treat the poorest patients or keep money flowing to community health centers. But lawmakers may be hard-pressed to justify the price tag this time, and are seeing an unusual assortment of appeals for help.
Background: 2% Medicare sequester cuts that had been paused by the pandemic took effect last month. Another 4% cut could come at year’s end, if lawmakers don’t delay it.
These automatic reductions in spending come amid health labor force shortages, supply chain problems and other pressures that are making providers jockey for relief.
It will fall to Congress to pick winners and losers among hospitals, physicians, home health care groups, nursing homes and ambulance services. And each says the consequences of not helping are dire.
“The core question is how do they come up with the money and how do they decide to prioritize who give it to?” said Raymond James analyst Chris Meekins.
Go deeper: Hospitals arepressing hard for relief from the year-end sequester, and want Congress to extend or make permanent programs that support rural facilities and are slated to expire on Sept. 30, absent legislative action.
The American Hospital Association has estimated its members will lose at least $3 billion by year’s end.
Hospitals in the government’s discount drug program also have to be made whole after the Supreme Court unanimously overturned a huge pay cut stemming from a 2018 rule. And the industry also is seeking to reverse a planned cuts to supplementary payments for uncompensated care.
Doctors and nursing homes are among the other players lining up for relief from sequester cuts, specific Medicare payment changes that affect their businesses or new regulations.
The American Medical Association says Medicare cuts could threaten physician practices that have been racked by pandemic-induced retirements and burnout. “This is really about allowing patients and Medicare beneficiaries to continue care,” AMA President Jack Resneck told Axios.
National Association for Home Care and Hospice President Bill Dombi said over half of the home health agencies will run deficits if lawmakers don’t act. “When you have that many providers in the red, you can foresee there will be negative consequences. They’re already rejecting 20 to 30% of referrals for admissions to care, so it will be affecting patients,” said Dombi.
Ambulance services are also struggling. “Ambulance providers around the country are at a very near breaking point as we kind of walk along the ledge leading to this cliff at the end of the calendar year,” Shawn Baird, president of the American Ambulance Association and chief operating officer of Metro West Ambulance in Oregon, told Axios.
The other side: Despite Congress’ willingness to delay payment cuts, there’s not enough money to make everyone happy. And concerns about Medicare program’s solvency that emerged during the lengthy debate over the Democrats’ tax, climate and health package could dampen lawmakers’ enthusiasm for costly fixes that favor one provider group.
The continuation of the COVID-19 public health emergency and its myriad temporary payment allowances could also lessen a sense of urgency around provider relief.
The bottom line: For all the dire warnings, it’s unlikely Congress will do much until December, when it will likely pass a continuing resolution or an omnibus spending bill and could then move to delay the 4% cut.
This week we met with a health system chief clinical officer who sought guidance on physician leadership structures: “We have more ‘closely aligned’ doctors than ever, but I feel like we’re really short on physician leaders to organize our medical staff around important goals and move them forward.” It’s a common concern.
One medical group president lamented the loss of connection between doctors as their group grew rapidly: “Our medical group has almost doubled in size in the past five years. When we had 300 providers, I knew every one, and they all felt like they could come to me directly. We just passed 1,000, and there’s no way I can know a thousand people, let alone have a personal relationship with them.”
As networks have grown, executives have shared their need to develop a new “middle layer of physician leaders”, who can build personal connections with frontline doctors. But for this middle layer to work, they stress, these leaders must be tightly connected with the executives who run the group and the health system and carry real decision-making authority: “Real respect is critical, and it won’t happen if they feel like a mouthpiece.”
There was also debate about the right candidate for the job, in particular, the need to have younger physicians, who can relate directly to the needs of their peers, in leadership roles: “It took us a while to realize that the profile of our traditional medical staff leader, an older doctor nearing retirement, wasn’t working when we’re looking to lead a ‘majority millennial’ medical group.”
Regardless, every medical group agreed that they needed to identify and train more leaders, and create roles to bring them into leadership earlier in their careers. But many questions remain about how to design leadership roles. How many frontline providers can a leader work with? How should leadership structures span employed and aligned independent doctors? And how should leaders weigh same-specialty alignment versus cross-specialty collaboration? If you are thinking through these issues, we’d love to hear from you about what is working, and what challenges have emerged.
One of COVID’s many effects on the health system business model has been the accelerated migration of care to outpatient settings, with orthopedic surgeries, such as knee and hip replacements, leading the way. For this week’s graphic, we partnered with Stratasan, a Syntellis-owned healthcare data analytics firm that provides market intelligence for strategic planning, to track how quickly joint replacements have shifted to hospital outpatient and ambulatory surgery centers (ASCs) over the last five years.
Using data from Stratasan’s proprietary All-Payer Claims Database, we found that by the end of 2021, only one in four knee replacements and one in three hip replacements were performed in inpatient facilities, down from over 95 percent in 2018. A major catalyst for the shift was the removal of the procedures from Medicare’s Inpatient Only list, first knee replacements in 2018, then hip replacements in 2020.
This change triggered an outpatient shift across all payers; COVID’s dampening effect on inpatient demand only exacerbated the trends. Patients who undergo these surgeries in an inpatient hospital tend to be sicker, older, and more likely to be on Medicare. This translates to an altered payer mix for these procedures, with hospitals seeing a drop in lucrative commercial payment and an uptick in lower Medicare reimbursements.
Amid rising expenses and slow-to-return volumes across the board, this outpatient migration presents another significant challenge to health systems’ financial bottom lines, and they must either find ways to recapture revenues in ambulatory settings, or watch a once reliable source of revenue walk—gingerly—out their doors.
This week, the Food and Drug Administration (FDA) announced a change intended to stretch out the limited supply of monkeypox vaccine doses, allowing the shots to reach five times the number of patients. Monkeypox, a disease in the smallpox family, is spread primarily through skin-to-skin contact, often causing patients to develop painful lesions.
Although most cases resolve within a few weeks, the rapid growth in cases, now more than 9K domestically and 30K globally, is still a cause for concern, leading federal officials to declare a public health emergency last week. The FDA is also recommending that providers administer the vaccine between layers of skin, rather than below the skin into fatty tissue. This dosing change will allow providers to extend the nearly half a million doses not yet sent to states, in order to reach the more than 1.6M Americans considered highest risk.
The Gist: The country is now dealing with two public health emergencies from highly contagious diseases simultaneously. While monkeypox isn’t nearly as transmissible, deadly, or overwhelming to the healthcare system as COVID, the public health response has nonetheless been lackluster (and this week’s new COVID guidance suggests that the CDC has largely given up on managing the response, devolving responsibility to individuals in nearly all settings).
For those hoping that the COVID experience would spark faster action by our public health system, the federal response to monkeypox shows we haven’t applied the lessons learned. Public health authorities aren’t conducting rigorous disease surveillance, testing and treatments remain hard to get, and Congress isn’t dedicating funds for the response. The lack of proactive leadership is likely to result in healthcare providers again bearing the brunt of efforts to manage another unsuppressed viral outbreak.
HENRY KOTULA 