El Segundo, Calif.-based Verity Health, which operates six hospitals in Northern and Southern California and maintains ties to billionaire former surgeon Patrick Soon-Shiong, MD, filed for bankruptcy Aug. 31, Reuters reports.
Verity Health CEO Richard Adcock told Reuters he expects the system to remain in bankruptcy protection for at least a few years as it restructures and continues working with potential buyers.
The bankruptcy announcement comes on the heels of several deals that left the system with more than $1 billion in pension liabilities and bond debt. Verity Health reportedly secured a $185 million loan to remain operational.
Mr. Adcock added the system has been losing nearly $175 million per year on a cash flow basis.
In July, Verity Health revealed it is examining all strategic options, including a sale, of some or all of its hospitals. Mr. Adcock told Reuters the system has received a number of offers, including from several large national hospital operators.
Dr. Soon-Shiong, who has founded and sold several biotech companies and recently purchased the Los Angeles Times and other newspapers for $500 million, acquired Verity Health’s management company in 2017. At the time, he said his goal was to revitalize the health system, which has come to employ 6,000-plus people as of 2017.
Mr. Adcock said the health system is re-examining all of its contracts, including the management deal with Dr. Soon-Shiong, Reuters reports.
Hospitals, especially nonprofit facilities, are facing difficult times. Morgan Stanley recently reported that about 18% of more than 6,000 hospitals studied were at a risk of closure or are performing weakly. About 8% of studied hospitals were at risk of closing and 10% were called “weak,” according to that report.
For perspective, just 2.5% of hospitals closed over the past five years.
What’s in store for hospitals in the near term depends on the specific outlook. Moody’s this year revised its outlook for the sector from stable to negative. That move followed nonprofit hospitals seeing more credit downgrades in 2017.
On the other hand, Fitch Ratings recently called off its “Rating Watch” for U.S. nonprofit hospitals and health systems after the organizations showed improved or stable results this year.
So, there are signs of improvement in the sector, but challenges with revenues, sagging reimbursements and lower admissions will continue to plague hospitals.
The reasons Moody’s gave for lower revenue growth came from lower reimbursements, the shift to outpatient care, increased M&A activity and additional ambulatory competition. It said the move away from inpatient to outpatient moved into its fifth year.
“Reversing sluggish volume trends and growing profitable service lines will be critical to improving the sector’s financial trajectory over the near-term as most hospitals continue to operate in a fee-for-service environment,” Sverdlik said.
Moody’s added that more hospitals reported operating deficits in 2017. That coincided with lower absolute operating cash flow. It said 28.4% of nonprofit hospital experienced operating losses, an increase from 16.5% in 2016. Also, 59% of providers reported lower absolute operating cash flow, which was more than double the 24% noted in 2015. The 2017 figure was the highest percentage in five years.
Don’t expect times to get better any time soon. Moody’s said nonprofit hospital margins will continue to remain thin through this year. Margins have fallen to an all-time low of 1.6% operating and 8.1% of operating cash flow.
“Margin pressures led to softened debt coverage ratios, though the median growth rate of total debt has been negative over the last five years,” Sverdlik said. “Ongoing operating pressures will constrain the ability to reverse these trends, especially if providers turn to debt to fund capital needs.”
However, it’s not all bad news. Moody’s said the medians have shown positive signs. For instance, median unrestricted cash and investments growth rate improved to 8.9% thanks to strong market returns and steady capital spending. Also, absolute cash growth exceeded expenses growth, which caused improved median cash on hand. That trend isn’t expected to continue if hospitals spend more cash flow on capital or if equity markets fall.
Strong balance sheets and capable leadership continue to lead the way for stable success.
M&A activity has bolstered the financial standing and credit ratings of not-for-profit health systems.
Not-for-profit systems are outnumbering stand-alone hospitals through increased M&A activity.
Stand-alone hospitals experienced their second consecutive year of negative outlooks.
Not-for-profit health systems and stand-alone hospitals have maintained generally favorable bond ratings due in large part to strong balance sheets, despite the continual decline in operating margins and cash flows.
S&P Global Ratings released research this week on the financial status of not-for-profit health systems and stand-alone hospitals in 2017.
The sector remained consistent in several year-to-year, such as improving days’ cash-on-hand levels and marginal reduction in debt levels, though the study found that the underlying pressures on not-for-profits are beginning to take their toll. The operating margin for the sector declined from 2.4% in 2016 to 1.8% in 2017.
S&P also noted that not-for-profit health systems continue to outnumber stand-alone hospitals and received stronger overall ratings from the agency.
S&P said a major factor that allowed health systems and hospitals to weather financial challenges last year was the combination of strong balance sheets and leadership.
S&P analysts said that stand-alone hospitals featured stronger medians than systems but found they are weakening. This is due to softer patient volumes, a weakening payor mix combined with increased pressure from commercial payors, and labor expenses.
Hospitals are bracing for an increase in unpaid medical bills and related uncompensated care after the Republican-led Congress let funding for the Children’s Health Insurance Program lapse.
Congressional committees this week are working on language to renew the CHIP program after federal funding expired Saturday, Sept. 30, leaving coverage of 9 million children in doubt. What was thought to be a done deal with bipartisan agreement a month ago that CHIP would be renewed for five years has lately become bogged down in Congressional gridlock and charges of ineptitude against Republicans and the Trump White House.
“States will not have access to additional funds and either will have to scramble to find money to pay for the health care costs for some of the most vulnerable patients or hospitals likely will experience a surge in uncompensated care,” Mizuho Securities USAresearch director Sheryl Skolnick said in a report Wednesday. “The need to reauthorize CHIP was well-known and the failure seems symptomatic of the larger issue of a dysfunctional political process.”
Some states could begin to run out of money to cover children over the next three months, triggering an uptick in medical bills that could lead to layoffs and a freeze on capital spending.
Hospitals generally account for CHIP funds in their Medicaid revenues, which can be 10% and 20% of some facility revenues. For-profit hospital operators like Tenet Healthcare, HCA Holdings and Community Health Systems, though, have less than 10% of their operations funded by Medicaid, Mizuho’s report this week shows.
Since the Affordable Care Act expanded coverage to more than 20 million Americans, hospital charity care and related uncompensated care expenses that include bad debt have dropped significantly.
Uncompensated care costs for the nation’s 4,862 hospitals dropped below 5% to 4.2%, or $35.7 billion in 2015, the American Hospital Association’s most recent tally shows. The 2015 level of uncompensated care costs were the lowest amount since 2007 , the AHA figures show.
But a loss in money from millions of children covered by CHIP would reverse the uncompensated care trend and certainly hit hospitals hard.
The healthcare industry was still hopeful momentum would return in Congress and CHIP funding would be renewed before providers and their patients would be harmed.
“Given CHIP’s immensely positive impact on children’s health, MHPA is very gratified that the House language released on Monday, October 2 extends the CHIP funding for another five years,” Medicaid Health Plans of America said in a letter to Congress. “We also appreciate that the language acknowledges any changes to funding must be made carefully and over time by gradually reducing the temporary 23 percent increase to 11.5 percent in October 2019, before allowing the program to resume the regular CHIP funding in October 2020. MHPA also appreciates that the funding, once extended, will be retroactive thus ensuring states’ current budgets will not be negatively affected.”
MHPA members include Aetna, Centene, Cigna and UnitedHealth Group.