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Todd Hofheins, Providence SVP, CFO
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Providence looks toward future growth after ratings downgrades


By Beth Kutscher
Posted: June 9, 2014 - 7:45 pm ET
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Two ratings agencies have downgraded Providence Health & Services’ bonds, citing the system’s weaker financial performance in 2013 and higher debt burden. Providence—the fourth largest not-for-profit in the U.S. by revenue—says its results will improve this year as the system moves beyond costly investments.

Moody’s Investors Service on Monday downgraded Providence’s new Series 2014A bonds and long-term parity debt to Aa3, one notch below the system’s previous Aa2. On Friday, Standard & Poor’s downgraded Providence’s new and outstanding bonds to AA- from AA.

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Fitch Ratings, however, affirmed its AA rating. The outlook across all three ratings agencies is stable.

Providence’s operating margin declined to 0.3% in fiscal 2013, down from 1.6% the previous year, Moody’s said, adding that this is the third year that the Renton, Wash.-based system has underperformed its historical metrics.

At the same time, Providence saw an 8% increase in its debt in 2013 and plans another 7% debt increase this fiscal year. Its underfunded pension liability was $819 million at the end of fiscal 2013, according to Moody’s.

S&P similarly cited Providence’s weaker operating income, cash flow and cash available to service its debt as factors impacting the ratings downgrade, but also pointed out that the system’s financials have started to recover in fiscal 2014.

Providence, however, faces declining revenue from federal disproportionate-share hospital payments starting in 2016, the agency said, and still needs to grapple with its underfunded pension plan.

Todd Hofheins, Providence’s senior vice president and chief financial officer, said the system’s lower operating margin reflects a number of investments that should lead to greater profitability in the future.

For instance, Providence implemented Epic electronic health-record systems in all five of its states at a cost of $750 million, he said, describing the move as critical to its accountable-care and population health initiatives. It also has made other investments in shared services, such as combining revenue-cycle, accounts payable and other administrative functions into one central group.

Finally, the system has been building its ACO and population health capabilities, first in Oregon and now Washington. “All of those kinds of things require infrastructure,” Hofheins said. “Unfortunately, you can’t do that by cutting costs—you have to get there by investment.”

And Hofheins said he expects a turnaround this year; the Epic implementation is finished, its hospitals are positioned to benefit under Medicaid expansion and the system is targeting $400 million in savings from shared services over the next three to four years.

Providence also disclosed in a statement to bondholders (PDF) Monday that it plans to take over ownership of Kadlec Regional Medical Center, a 249-bed hospital in Richland, Wash. Western HealthConnect, a secular organization within the Catholic system, will become Kadlec’s sole corporate member.

“We take the long view,” he said. “The conversations with the ratings agencies have only gotten better. They know where we’re going, but they can’t give credit to us today.”

Follow Beth Kutscher on Twitter: @MHbkutscher


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