Tag Archives: Credit Ratings

15 recent hospital, health system outlook and credit rating actions

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The following hospital and health system credit rating and outlook changes and affirmations occurred in the last week, beginning with the most recent.

1. S&P downgrades Westchester County Health Care to ‘BBB-‘
S&P Global Ratings downgraded Valhalla, N.Y.-based Westchester County Health Care’s revenue and refunding bonds to “BBB-” from “BBB.”

2. S&P revises UAB Medicine’s outlook to negative over weaker operations
S&P Global Ratings revised Birmingham, Ala.-based UAB Medicine’s outlook to negative from stable.

3. S&P upgrades Torrance Memorial Medical Center’s rating to ‘A’
S&P Global Ratings upgraded its long-term and underlying rating on Torrance (Calif.) Memorial Medical Center’s outstanding debt to “A” from “BBB.”

4. Moody’s affirms ‘A1’ rating on ProHealth Care
Moody’s Investors Service affirmed its “A1” rating on Waukesha, Wis.-based ProHealth Care, affecting $181 million of outstanding debt.

5. Moody’s assigns ‘Baa1’ to Baptist Healthcare System’s bonds
Moody’s Investors Service assigned its “Baa1” rating to Louisville-based Baptist Healthcare System’s proposed $130 million series 2018A revenue refunding bonds. At the same time, Moody’s upgraded the health system’s parity debt to “Baa1” from “Baa2,” affecting $442 million of debt.

6. S&P assigns ‘BBB+’ rating to CHI’s bonds
S&P Global Ratings assigned its “BBB+” long-term rating on Englewood, Colo.-based Catholic Health Initiatives’ proposed $275 million series 2018A bonds.

7. S&P places Essentia Health on credit watch negative
S&P Global Ratings placed its “A” underlying rating on Duluth, Minn.-based Essentia Health on credit watch with negative implications.

8. S&P revises Halifax Hospital Medical Center’s outlook to negative over litigation risks
S&P Global Ratings affirmed its “A-” long-term rating on Daytona Beach, Fla.-based Halifax Hospital Medical Center’s revenue bonds and revised the outlook to negative from stable.

9. Fitch assigns ‘AA’ IDR to Advocate Aurora Health
Fitch Ratings assigned an issuer default rating of “AA” to Advocate Aurora Health — the entity formed by the recent merger of Downers Grove, Ill.-based Advocate Health Care and Milwaukee-based Aurora Health.

10. Fitch affirms Nebraska Medicine’s ‘AA-‘ rating
Fitch Ratings affirmed its “AA-” rating on Omaha-based Nebraska Medicine’s outstanding bonds. Concurrently, Fitch assigned its “AA-” issuer default rating to the academic healthcare provider.

11. Fitch affirms ‘AA’ rating on Presbyterian Healthcare
Fitch Ratings affirmed its “AA” rating of Albuquerque, N.M.-based Presbyterian Healthcare Services’ outstanding bonds, affecting $850 billion of debt. At the same time, Fitch assigned its “AA” issuer default rating to the health system.

12. Moody’s affirms ‘Aa3’ rating on Main Line Health
Moody’s Investors Service affirmed its “Aa3” rating on Philadelphia-based Main Line Health’s outstanding bonds, affecting $219.5 million of debt.

13. Moody’s downgrades Lafayette General Medical Center
Moody’s Investors Service downgraded its rating on Lafayette (La.) General Medical Center to “Baa2” from “Baa1,” affecting $147 million of rated debt.

14. Moody’s affirms SCL Health’s ‘Aa3’ rating
Moody’s Investors Service affirmed its “Aa3” long-term rating on Sisters of Charity of Leavenworth (Kan.) Health System, which does business as SCL Health. The rating affects about $1.2 billion of debt.

15. S&P ratings on ProMedica debt unchanged after HCR ManorCare acquisition
ProMedica’s acquisition of Toledo-based nursing home chain HCR ManorCare will not immediately affect its “A+” long-term ratings on the Ohio-based health system’s debt, according to S&P Global Ratings.

 

 

MARKET SHARE STILL MATTERS: 3 WAYS TO WIN

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For CEOs, market share is critical. But measurement of it, and tactics to grow it, are getting more complicated as patients connect with providers in more sophisticated ways.

Health system CEOs have always worked to meet their mission of caring for the poor and underserved and improving the health of their community. They often cite that mission as their top priority. But in truth, they are evaluated by how well they grow revenue and margin, both of which come through expanding market share.

Market share used to be easy to define. CEOs counted on a reliably increasing reimbursement model that exceeded inflation and an aging population that meant more hospital days every year. No longer. But even though market share growth is much more complex now, failing to achieve that growth could mean termination.

To win the market share battle, healthcare organizations must first redefine what it is (see the sidebar on new market share proxies) and then build strategies that take advantage of the shifts in healthcare delivery. Here’s how three healthcare leaders are doing it.

NORTHWELL: ‘THE CONSUMER IS THE DETERMINANT OF SUCCESS’

Michael Dowling, president and CEO of Northwell Health in Great Neck, New York, acknowledges the need to provide access, value, and convenience for consumers who are increasingly looking for a wide-ranging array of services offered by a single health system. The key to this strategy is the consumer as the focal point of healthcare decision-making.

Northwell is currently investing heavily in home health and digital care access, including a major initiative in telemedicine, but tying it all together into a seamless consumer experience is critical.

“You need hospitals as anchors, but the strategy is very consumer-focused in providing access and convenience,” Dowling says. “We’ve been doing this for 10 years, and it’s one of the reasons we’ve grown to being one of the biggest players in the New York City market. It’s the interconnection of all these pieces that makes all the difference.”

Although it’s not a perfect analogy, Dowling says Northwell wants to emulate Starbucks’ approach to market coverage. It’s not a location on every street corner, but it’s close.

“The traditional way of looking at market share isn’t valid anymore.”

—Chris Van Gorder

Also, getting critical market share mass in a variety of modalities is necessary to becoming the viable narrow network that employers and insurers are looking for. Smart health systems are spending more on smaller facilities, like micro-hospitals, or on freestanding ERs, homecare, urgent care centers, and telehealth capabilities. Such investment aims to meet the everyday health needs of consumers, not just provide for their increasingly rare inpatient stays.

This means focusing on organic growth that complements or even stands alone from the inpatient realm rather than buying hospitals, for example. Specialized areas of investment in both inpatient and outpatient care are the usual profitable service lines, such as orthopedics, neurology, and cardiac care, says Dowling.

He says he seeks two kinds of market share when it comes to reimbursement: Medicare and Medicaid, and commercial. Both kinds are needed to serve the community comprehensively, he says, but only one of the two makes a margin. Patients don’t see that distinction, though, and Northwell must serve them all.

“[Commercial] is what everyone’s going after,” he says. “So, you try to be the preferred provider. You take market share from competitors by developing the physician relationship and by the expansion of ambulatory. We’ve built a massive ambulatory network with over 650 locations. It’s a marketing and consumer experience strategy. If patients are not happy with experience, they will go somewhere else, so it’s multifaceted.”

Hospital-centric organizations used to measure market share in terms of inpatient volume or discharges, but as more services have moved outside the hospital environment, those have become less reliable measures of success.

“We’re all moving toward understanding that the consumer is the determinant of success, rather than just the patient care business,” says Dowling. “The consumer is going to be determining how they want care and where, and since more of it is not needed in the hospital, you have to create locations for cancer care and imaging and surgery where it can be done on an ambulatory basis.”

SCRIPPS: ACCENTUATE YOUR STRENGTHS

Chris Van Gorder, the longtime president and CEO of Scripps Health in San Diego, is content with a level of uncertainty around market share, and says that growing it depends partially on instinct in a time of upheaval.

“Market share’s an odd thing. Everyone still wants to gain commercial market share, of course,” he says. “But today we’re not so focused on the inpatient side. We’re doing total hips on the ambulatory side. So, the traditional way of looking at market share isn’t valid anymore.”

Even though the discharge-based methodology isn’t as relevant as it used to be, it’s still important. Rating agencies still use discharges as an important tool to measure financial health, and with the relative lack of precise alternatives, discharges can be an important factor in how they determine borrowing capacity and interest rate terms for healthcare organizations.

“As an industry, we have to figure that out,” Van Gorder says. “Rating agencies use discharges, but you could be reducing that number and getting stronger as an organization.”

Scripps went through its rating agency sessions about three months ago and has seen a small decline in those traditional market share measures, but Van Gorder says those measures don’t tell the full story anymore. Scripps’ market is dominated by three major players: itself, Kaiser Permanente, and Sharp HealthCare, so fluctuations in discharges are often small and at the edges.

Rating agencies are smart enough to recognize that healthcare is changing, Van Gorder says. For example, they know it’s the right strategy to move to ambulatory, and Scripps experienced growth in covered lives in its health plan, which is part of Scripps’ strategy to build its own narrow network. But even rating agencies are frustrated that there’s no metric to enable consistent comparisons, he says.

“We still talk about market share because I still need to make sure the hospitals are occupied enough. Half-full hospitals are the fastest way to go bankrupt,” he says.

Scripps is strong in cardiovascular services, particularly interventional cardiology. “So, we focus on maintaining our strength in that area and in ortho, which is becoming much more ambulatory than it used to be,” says Van Gorder.

One area where it’s not as strong is cancer, he says, even though Scripps is a major oncology provider in San Diego. To maintain and even buttress that market share, the health system has partnered with Houston’s MD Anderson Cancer Center to build a new comprehensive cancer program that started treating patients this summer.

“[MD Anderson] is building a network strategy, and they have 23,000 people just working on cancer, so we are taking advantage of their knowledge to make us stronger,” he says. “It was a market share play, but it’s much more than just that, with increased access to research and clinical trials.”

Facing fierce competition in ambulatory, Van Gorder says the health system is focusing on areas where it’s strongest and trying to grow there.

In all areas, he says Scripps must aggressively focus on cutting costs, because he sees cost as a proxy for quality. In fact, he notes, cost may be the major limitation for most health systems in growing market share for the foreseeable future.

“People are paying more out of pocket to come in, and insurance companies have gotten so good at narrow networks,” he says. “People tell me you can’t lead with cost, and I say no. Cost is a quality indicator.”

GRADY: INVESTING IN SPECIALTY SERVICES

Safety-net hospitals, such as Grady Health System in Atlanta, have historically been overrun by mission patients—that is, patients who do not bring margin, such as Medicaid patients. But its leadership has recognized that the health system needs to be more competitive in commercial patients.

For Grady, that hasn’t meant investment in traditional service lines, but instead investment in highly complex tertiary and quaternary services that can’t easily be found elsewhere in its market, says John Haupert, its president and CEO. With seed funding from philanthropic sources, Grady has made multimillion-dollar investments in stroke and neurological surgery, interventional cardiology, and surgical subspecialties.

“In our case, it was a matter of survival. If all your patients are Medicaid or unfunded, you’re not going to be in business. Part of Grady coming back to life 10 years ago involved developing strategies to grow in funding the mission,” says Haupert.

The complex cases that have come from Grady’s recent investments weren’t previously present in the market. Unlike many organizations, Grady needed to create additional inpatient capacity to maximize those investments in capital and talent. It will soon be operating around 700 occupied beds; 10 years ago, it was barely operating 400. It’s building new outpatient facilities as well, expanding ambulatory surgical and oncology capacity across the street to free up space in the main facility where its cancer center is now.

“In the next three years, we’ll have 750 beds in operation,” Haupert says. “We’ve gone from 9% to 20% commercial. That helps with sustainability.”

 

Can A Community Hospital Stick To Its Mission When It Goes For-Profit?

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Proponents of hospital mergers say the change can help struggling nonprofit hospitals "thrive," with an infusion of cash to invest in updated technology and top clinical staff. But research shows the price of care, especially for low-income patients, usually rises when a hospital joins a for-profit corporation.

Mission Health, the largest hospital system in western North Carolina, provided $100 million in free charity care last year. This year, it has partnered with 17 civic organizations to deliver care for substance abuse by people who are low-income.

Based in bucolic Asheville, the six-hospital system also screens residents for food insecurity; provides free dental care to children in rural areas via the “ToothBus” mobile clinic; helps the homeless find permanent housing and encourages its 12,000 employees to volunteer at schools, churches and nonprofit groups.

Asheville residents say the hospital is an essential resource.

“Mission Health helped saved my life,” says Susan ReMine, a 68-year-old Asheville resident for 30 years who now lives in nearby Fletcher, N.C. She was in Mission Health’s main hospital in Asheville for three weeks last fall with kidney failure. And, from 2006 to 2008, a Mission Health-supported program called Project Access provided ReMine with free care after she lost her job because of illness.

After 130 years as a nonprofit with deep roots in the community, Mission Health announced in March that it was seeking to be bought by HCA Healthcare, the nation’s largest for-profit hospital chain. HCA owns 178 hospitals in 20 states and the United Kingdom.

The pending sale reflects a controversial national trend in the U.S. as hospitals consolidate at an accelerating pace and the cost of health care continues to rise.

“We understand the business reasons [for the deal], but our overwhelming concern is the price of health care,” says Ron Freeman, chief financial officer at Ingles Markets, a supermarket chain headquartered in Asheville with 200 stores in six states.

“Will HCA after a few years start to press the hospital to make more profit by raising prices? We don’t know,” Freeman says.

And the local newspaper, the Citizen Times, editorialized in March: “How does it help to join a corporation where nearly $3 billion that could have gone to health care instead was recorded as profit? … We would feel better were Western North Carolina’s leading health-care provider to remain master of its own fate.”

Across the U.S., the acquisition of nonprofit hospitals by corporations is raising concern among some advocates for patients and communities.

“The main motivation of for-profit companies is to grow so they can cut costs, get paid more and maximize profits,” says Suzanne Delbanco, executive director of the Catalyst for Payment Reform, an employer-led health care think tank and advocacy group. “They are not as focused on improving access to care or the community’s overall health.”

Merger mania across the U.S.

From 2013 to 2017, nearly 1 in 5 of the nation’s 5,500-plus hospitals were acquired or merged with another hospital, according to Irving Levin Associates, a health care analytics firm in Norwalk, Conn. Industry analysts say for-profit hospital companies are poised to grow more rapidly as they buy up both for-profits and nonprofits — potentially altering the character and role of public health-oriented nonprofits.

Nonprofit hospitals are exempt from state and local taxes. In return, they must provide community services and care to poor and uninsured patients — a commitment that is honored to varying degrees nationwide.

Of the nation’s 4,840 general hospitals that aren’t run by the federal government, 2,849 are nonprofit, 1,035 are for-profit and 956 are owned by state or local governments, according to the American Hospital Association.

In 2017, 29 for-profit companies bought 18 for-profit hospitals and 11 not-for-profits, according to an analysis for Kaiser Health News by Irving Levin Associates.

Sales can go the other way, too: 53 nonprofit hospital companies bought 18 for-profits as well as 35 nonprofits in 2017.

A recent report by Moody’s Investors Service predicted stable growth for for-profit hospital companies, saying they are well-positioned to demand higher rates from insurers and have less exposure to the lower rates paid by government insurance programs such as Medicare and Medicaid. In contrast, a second Moody’s report downgraded — from stable to negative — its 2018 forecast for the not-for-profit hospital sector.

‘We wanted to thrive, and not just survive’

Ron Paulus, Mission Health’s president and CEO, says he and the hospital’s 19-member board concluded last year that the future of Mission Health was iffy at best without a merger.

HCA declined to make anyone available for an interview but provided this written statement: “We are excited about the prospect of a transaction that would allow us to support the caliber of care they [Mission Health hospitals] have been providing.”

Driving Mission Health’s decision, Paulus says, were strained finances and the board’s strong feeling that the hospital needed to invest in new technology, modern data management tools and top clinical talent.

“We wanted to thrive and not just survive,” he says. “I had a healthy dose of skepticism about HCA at first. But I think we made the right decision.”

During the past four years, Paulus says, the company has had to cut costs — from between $50 million and $80 million a year — to preserve an “acceptable operating margin.” The forecast for 2019 and 2020, he says, saw the gap between revenue and expenses rising to $150 million a year.

Miriam Schwarz, executive director of the Western Carolina Medical Society, says many physicians in the area were surprised by the move and “are trying to grapple with the shift.”

“There’s concern about the community benefits, but also job loss,” Schwarz says. Still, she adds, the doctors in her region “do recognize that the hospital must become more financially secure.”

Weighed against community concerns is the prospect of a large nonprofit foundation created by the deal. Depending on the final price, the foundation could have close to $2 billion in assets.

Creation of such foundations is common when for-profit companies buy nonprofit hospitals or insurance companies. Paulus says the foundation created from Mission Health could generate $50 million or more a year to — among other initiatives — “test new care models such as home-based care … and address the causes of poor health in the community in the first place.”

In addition, HCA will have to pay upward of $10 million in state and local taxes.

Mixed results

Industry analysts say the hospital merger and consolidation trend nationwide is inevitable given the powerful forces afoot in health care.

That includes pressure to lower prices and costs and improve quality, safety and efficiency; to modernize information technology systems and equipment; and to do more to improve overall health.

But academics and consumer advocates say hospital consolidation yields mixed results. While mergers — especially purchases by for-profit companies — provide much-needed capital and financial stability, competition is stifled, and that’s often led to higher prices.

Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University, and colleagues examined 366 hospital mergers from 2007 to 2011 and found that prices were, on average, 12 percent higher in areas where one hospital dominated the market versus areas with at least four rivals. Another recent study found that 90 percent of U.S. cities today have a “highly concentrated” hospital market. Asheville is one, and Mission Health is dominant there.

“The evidence is overwhelming at this point,” Gaynor says. “Mergers solve some problems for hospitals, but they don’t make health care less expensive or better. In fact, prices usually go up.”

Mission Health CEO Paulus says he believes HCA is committed to restraining price increases and the growth in costs.

If no obstacles arise, Paulus says, HCA’s purchase of Mission Health would be formalized in August and finalized in November or December, pending state regulatory approval.

 

 

 

UNITEDHEALTH SEES EARNINGS INCREASE 13% IN Q2

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The insurer saw solid year-over-year growth in a variety of aspects, leading the company to raise its outlook for net earnings to end the year.

UnitedHealth Group posted $4.2 billion earnings from operations, an increase of 13% year-over-year, according to its second-quarter earnings report released Tuesday.

The results marked another strong quarter for the insurer, which saw its earnings from operations grow from $3.7 billion during Q2 2017, and even increase from $4.1 billion in Q1 2018. Compared to this time last year, UnitedHealth increased its overall revenues by $6 billion, improving its net margin to 5.2%.

“Today, UnitedHealth Group delivers increasing value to more people, driven by strong execution, consistently high quality, deep relationships and our distinctive combination of clinical, technology and information capabilities. As we look ahead, we will drive our growth on the strength of practical innovations that anticipate and respond to increasing consumer expectations and clear social needs,” UnitedHealth Group CEO David Wichmann said in a statement.

UnitedHealth’s consistent, improved performance comes as insurers brace for the widespread introduction of association health plans and short-term health plans. The health plan juggernaut is so enthused by its first-half financial performance that it raised its outlook for end-of-year adjusted earnings to $12.50 to $12.75 per share. After Q1, UnitedHealth projected a range of adjusted net earnings per share from $12.40 to $12.65. Meanwhile, GAAP diluted earnings ranged between $11.80 to $12.05 per share.

Moody’s Vice President Dean Unger said in a statement Tuesday that UnitedHealth’s leverage remains high and will increase slightly after the company finalizes its acquisition of DaVita Medical Group.

“But the pharmacy benefits manager and analytics business were also solid,” Unger said. “UnitedHealth’s scale, diversity and consistent and disciplined growth continue to support our A3 long-term issuer rating.”

Below are some additional highlights from UnitedHealth’s Q2 earnings report:

  • UnitedHealth posted cash flows from operations totalling $4 billion.

  • The insurer’s adjusted net earnings per share also grew 27.6%.

  • UnitedHealthcare added 2.2 million more consumers year-over-year.

  • Optum’s earnings from operations grew by 21.5% year-over-year to $1.8 billion.

Additional information is available in UnitedHealth’s filing with the Securities and Exchange Commission.

 

 

Moody’s: Nonprofit hospital rating downgrades rose sharply in 2017

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Despite a strong economy and low uninsured population, nonprofit hospital rating downgrades sharply outpaced upgrades throughout 2017 — creating a downgrade-to-upgrade ratio of 3.4 to 1.0, which is more than double the 2016 ratio of 1.5 to 1.0, according to a new report by Moody’s Investors Service.

In 2017, there were 41 credit downgrades and 12 credit upgrades for nonprofit hospitals, compared to 32 credit downgrades and 21 credit upgrades in 2016.

Moody’s attributed the credit stress in 2017 to rising labor and supply costs coupled with a low revenue growth environment.

“An acute nursing shortage in many markets, along with rising supply and pharmaceutical costs, resulted in expense growth outpacing revenue growth for many hospitals and health systems,” the Moody’s report reads.

While hospitals of all sizes were downgraded, 60 percent of the downgrades in 2017 affected smaller health systems with less than $1 billion in total operating revenue. In addition, 12 of the downgrades occurred in Pennsylvania and Ohio, reflecting the lagging economy, aging demographics, competitive service area and commercial payer challenges in the Rust Belt area.

Although downgrades outpaced upgrades in 2017, Moody’s affirmed the vast majority of ratings in 2017, which is in line with historical trends.

13 health systems with strong finances

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Here are 13 health systems with strong operational metrics and solid financial positions, according to recent reports from Moody’s Investors Service and S&P Global Ratings.

Note: This is not an exhaustive list. Health system names were compiled from recent credit rating reports and are listed in alphabetical order.

1. Downers Grove, Ill.-based Advocate Health Care has an “Aa2” rating and stable outlook with Moody’s. The health system has a strong market position, healthy liquidity, moderate leverage and good debt metrics, according to Moody’s.

2. Morristown, N.J.-based Atlantic Health System has an “Aa3” rating and stable outlook with Moody’s and an “AA-” rating and stable outlook with S&P. The system has stable operating performance, balance sheet growth and a favorable market position, according to Moody’s.

3. Dallas-based Baylor Scott & White Health has an “Aa3” rating and stable outlook with Moody’s. The health system has strong cash flow margins and a favorable business position as the largest nonprofit health system in Texas, according to Moody’s.

4. Milwaukee-based Children’s Hospital and Health System has an “Aa3” rating and stable outlook with Moody’s. The system has a strong balance sheet and is the dominant provider of tertiary and quaternary pediatric services in southeastern Wisconsin, according to Moody’s.

5. Indianapolis-based Indiana University Health has an “Aa2” rating and stable outlook with Moody’s. The system has healthy margins and a strong market position, according to Moody’s.

6. Rochester, Minn.-based Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. Mayo has an excellent clinical reputation and diversified revenue across multiple locations, states and types of hospitals, according to Moody’s.

7. Mercy Health in St. Louis, Mo., has an “Aa3” rating and stable outlook with Moody’s and an “AA-” rating and stable outlook with S&P. The health system has solid debt service coverage and strong balance sheet metrics, according to Moody’s.

8. Chicago-based Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s. The system has a prominent and growing market position in the Chicago region, a strong investment position, good margins and manageable leverage, according to Moody’s.

9. San Diego-based Sharp HealthCare has an “Aa3” rating and stable outlook with Moody’s. The system has strong balance sheet measures and a fundamentally stable and strong strategic position, according to Moody’s.

10. Stanford (Calif.) Health Care has an “Aa3” rating and stable outlook with Moody’s. The system has a strong market position as one of two major academic medical centers in the Bay Area, has a reputation for clinical excellence and research, and is in a service area with strong population growth and high wealth levels, according to Moody’s.

11. Iowa City-based University of Iowa Hospitals & Clinics has an “Aa2” rating and stable outlook with Moody’s. The health system has a broad market with growing patient volumes and geographic reach for its high-acuity services. Moody’s expects the health system’s expense control initiatives to continue to gain traction through fiscal year 2018.

12. Philadelphia-based University of Pennsylvania Health System has an “Aa3” rating and stable outlook with Moody’s. The health system has a strong market position, solid operating margins and limited debt burden, according to Moody’s.

13. Yale New Haven (Conn.) Health System has an “Aa3” rating and stable outlook with Moody’s. The system has a leading market position in Connecticut, solid liquidity, moderate capital needs and manageable leverage, according to Moody’s.

Stanford Health Care’s operating income more than doubles in Q1

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Stanford (Calif.) Health Care saw revenues and operating income rise in the first quarter of fiscal year 2018, which ended Nov. 30, 2017, according to recently released bondholder documents.

The health system reported revenues of $1.16 billion in the first quarter of fiscal year 2018, up from revenues of $1.07 billion in the same period of the year prior. The system’s net patient revenue and premium revenue climbed 6 percent and 12 percent year over year, respectively.

Stanford Health Care kept expenses in check in the first quarter of this fiscal year. The system reported operating expenses of $1.08 billion, up 3.7 percent from the same period a year earlier.

The system ended the first quarter of fiscal year 2018 with operating income of $74.3 million, more than double the operating income of $28 million it reported in the first quarter of fiscal year 2017.

Stanford Health Care is part of Stanford Medicine, which also includes the Stanford University School of Medicine and Stanford Children’s Health.

 

Catholic Health Initiatives CFO Dean Swindle’s advice to other systems: ‘Don’t get too comfortable with your past success’

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Englewood, Colo.-based Catholic Health Initiatives embarked on a turnaround plan several years ago with the goal of improving its financial picture while providing high-quality care at its hospitals and other facilities across the nation. The system has made great strides toward its goal, yet there is still a lot of work to be done.

CHI has been laser-focused on performance improvement over the past three years, but rolling out a comprehensive turnaround plan across an organization with 100 hospitals is challenging, and progress is slow. The health system’s efforts just began to take hold in the second half of fiscal year 2017. Although CHI has encountered obstacles on its path to financial stability, the system is pleased with the headway it has made and expects more improvement in the coming months.

CHI’s cost-cutting initiative

To improve its finances, CHI set out to cut costs across the system. It put a great deal of energy into lowering labor and supply costs, which combined can make up two-thirds or more of the system’s operating expenses. CHI developed plans and playbooks focused on reducing these costs several years ago, knowing it would not immediately see results.

In the labor area, CHI President of Enterprise Business Lines and CFO Dean Swindle says the system had to incur costs to cut costs. “In the second half of the year [fiscal 2017] we began to see the benefits of our labor activities in the markets, but we also had cost,” he says. For example, CHI incurred the one-time expense of hiring advisers to help the system develop new labor management techniques. The system also cut jobs, which resulted in severance costs.

“When we got to the second half of 2017, we were very confident and felt very pleased that we were seeing benefit … but it was difficult for others to see it because it was for half of the year, and we had the one-time costs that were burdening that,” Mr. Swindle says.

After factoring in expenses and one-time charges, CHI ended fiscal year 2017 with an operating loss of $585.2 million, compared to an operating loss of $371.4 million in fiscal year 2016.

However, CHI saw its financial situation improve in the first quarter of fiscal year 2018. The system’s operating loss narrowed to $77.9 million from $180.7 million in the same period of the year prior. “What you were able to see in the first quarter [of fiscal 2018] … was the one-time costs had gone away for the most part; those weren’t burdening our results,” says Mr. Swindle.

He says although the system employed more physicians, its absolute labor costs were lower year over year. CHI’s supply costs, including drug costs, were also lower in the first quarter of fiscal year 2018 than in the first quarter of last year.

Mr. Swindle says CHI saw its finances improve in a difficult operating environment. Patient volume was lower in the first quarter of fiscal year 2018 than a year prior, and the system also experienced a nearly $26 million loss from business operations as a result of Hurricane Harvey.

“[This has] given us a level of confidence that we can move forward and address the difficulty that our industry is going to be facing over the next several years,” he says.

In early January, Fitch Ratings affirmed CHI’s “BBB+” rating and upgraded its credit outlook to stable from negative. The credit rating agency cited the health system’s strong start to the 2018 fiscal year and financial improvements in several markets as key reasons for the upgrade.

Preparing for new challenges

Although healthcare organizations are currently facing many challenges, including regulatory uncertainty and dwindling reimbursement rates, Mr. Swindle anticipates hospitals and health systems will face new obstacles over the next few years.

For example, hospitals will be challenged by changes to the 340B Drug Pricing Program. CMS’ 2018 Medicare Outpatient Prospective Payment System rule finalized a proposal to pay hospitals 22.5 percent less than the average sales price for drugs purchased through the 340B program. Medicare previously paid the average sales price plus 6 percent.

“I don’t think 340B was by chance and in isolation,” says Mr. Swindle. “I think we’re entering one of those cycles that the whole economic environment of our industry is going to be working against us.”

The pressures in the industry are driving hospitals and health systems to join forces. After more than a year of talks, CHI and San Francisco-based Dignity Health signed a definitive merger agreement in December 2017. The proposed transaction will create a massive nonprofit Catholic health system, comprising 139 hospitals across 28 states.

In the short term, the combination of the two systems is expected to drive synergies in the $500 million range, according to Mr. Swindle. In the coming months, the two systems will dive deeper into the synergies they expect to achieve over a multiyear period. “We do believe beyond the synergies there are some strategic initiatives we can put into place as a combined organization that we couldn’t do individually,” Mr. Swindle says. “You won’t see the benefit of those as much in the short term.”

“Take a deep breath”

Mr. Swindle knows firsthand that developing and executing an operational turnaround plan is no easy task. However, today’s healthcare landscape requires health systems to re-engineer their business models.

“Regardless of how good your results … have been over the last five to 10 years, we’re all going to have to transform ourselves in our own way to meet the characteristics of our organizations,” says Mr. Swindle.

When embarking on a performance improvement plan, the first thing health system CFOs should do is “take a deep breath,” he says. Then, they should focus on the things they have more control over. Mr. Swindle says it is critical for health systems to continue to drive improvement in patient experience and quality. They also need to be strategic cost managers.

“It’s not going to be as easy as just saying we’re going to take these [full-time employees] out or reduce this service. You’re really going to have to be very smart and very thoughtful about how you become a good cost manager that adds value to your communities,” says Mr. Swindle. “Don’t get too comfortable with your past success and your past models.”

 

Credit rating agency, researchers give vote of confidence to health insurance sector

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https://www.fiercehealthcare.com/payer/financial-performance-a-m-best-kaiser-family-foundation-insurers?mkt_tok=eyJpIjoiTjJRNU5qUXlZVEJqWmpjNCIsInQiOiJOR2V2bEp4NkdoeVB3VndhZE43TVBjZXdaTGJcLzk1Z3hBd1wvZ05teDMrcjZ5UzJhb0tzUkpQbWlaSmVvUmJFazVDcERmajBTREhCTXJxR3BBaGtoY1MrZlVtQW5xeXRSbFwvYVhPOE44VE9uYUhNZWNnbGtoR3c3S0xHUlp5SlwvS2kifQ%3D%3D&mrkid=959610

Health insurance, pen and stethoscope

Two new reports offer evidence that policy uncertainty aside, the health insurance industry is doing just fine.

In one report, A.M. Best explains why it decided to change its outlook for the health insurance sector from negative to stable. The credit rating agency said the change “reflects a variety of factors that have led to improvement in earnings and risk-adjusted capitalization.”

While insurers have experienced losses in the individual exchange business, this market segment has improved in 2016 and 2017—in part due to consecutive years of high rate increases, a narrowing of provider networks and a stabilizing exchange population, the report said.

A.M. Best also predicted that Congress won’t make repealing and replacing the Affordable Care Act a high priority in 2018. And even if it does, health insurers will have time to make adjustments, since legislative changes won’t take effect for two or more years.

The rating agency’s findings about the individual market echo those of a new report from the Kaiser Family Foundation, which examined insurers’ financial data from the third quarter of 2017.

It found that insurers saw significant improvement in their medical loss ratios, which averaged 81% through the third quarter. Gross margins per member per month in the individual market segment followed a similar pattern, jumping up to $79 per enrollee in the third quarter of 2017 from a recent third-quarter low of $10 in 2015.

One caveat is that KFF’s findings reflect insurer performance only through September—before the Trump administration stopped reimbursing insurers for cost-sharing subsidies. “The loss of these payments during the fourth quarter of 2017 will diminish insurer profits, but nonetheless, insurers are likely to see better financial results in 2017 than they did in earlier years of the ACA marketplaces,” KFF said.

As promising as these observations about the individual market are, A.M. Best pointed out that this market segment is just a small portion of most health insurers’ earnings and revenues. In fact, health plans largely owe their overall profitability to the combined operating results of the employer group, Medicaid and Medicare Advantage lines of business.

Looking ahead, the agency predicted that Medicare and Medicaid business lines will remain profitable for insurers—though margins will likely compress for both. It said the employer group segment will also remain profitable, but noted that membership will continue to be flat.

 

8 health systems with strong finances

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https://www.beckershospitalreview.com/finance/8-health-systems-with-strong-finances-122117.html

Here are eight health systems with strong operational metrics and solid financial positions, according to recent reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

Note: This is not an exhaustive list. Health system names were compiled from recent credit rating reports and are listed in alphabetical order.

1. Lincoln, Neb.-based Bryan Health has an “AA-” rating and stable outlook with Fitch. The system has a strong market position, healthy balance sheet metrics and growing patient volume, according to Fitch.

2. Mercy Health in Cincinnati has an “Aa3” rating and stable outlook with Moody’s and an “AA-” rating and stable outlook with S&P. The health system has solid debt service coverage and strong balance sheet metrics, according to Moody’s.

3. Chicago-based Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s. The system has a prominent and growing market position in the Chicago region, a strong investment position, good margins and manageable leverage, according to Moody’s.

4. San Diego-based Sharp HealthCare has an “Aa3” rating and stable outlook with Moody’s. The system has strong balance sheet measures and a fundamentally stable and strong strategic position, according to Moody’s.

5. Stanford (Calif.) Health Care has an “Aa3” rating and stable outlook with Moody’s. The system has a strong market position as one of two major academic medical centers in the Bay Area, a reputation for clinical excellence and research, and is in a service area with strong population growth and high wealth levels, according to Moody’s.

6. Iowa City-based University of Iowa Hospitals & Clinics has an “Aa2” rating and stable outlook with Moody’s. The health system has a broad market with growing patient volumes and geographic reach for its high-acuity services, according to Moody’s.

7. Philadelphia-based University of Pennsylvania Health System has an “Aa3” rating and stable outlook with Moody’s. The system has a strong and growing market position, good liquidity, and a history of beating budgets and managing capital spending relative to operating performance, according to Moody’s.

8. Yale New Haven (Conn.) Health System has an “Aa3” rating and stable outlook with Moody’s. The system has a leading market position in Connecticut, solid liquidity, moderate capital needs and manageable leverage, according to Moody’s.