Two of the nation's most prominent not-for-profit hospital systems saw their financial reputations get smudged a little last week, as a national bond-rating service predicted both would suffer a decline in profitability.
Moody's Investors Service downgraded about $1.7 billion in bonds issued by Catholic Healthcare West to A2 from A1, saying CHW's financial performance will "remain suppressed" over the next few years.
Moody's also lowered the bond rating for Detroit-based Henry Ford Health System to Aa3 from Aa2, affecting about $380 million of debt.
The downgrades are to be expected given "the softening of the economic health of hospitals in managed-care situations," said hospital consultant Wanda Jones of San Francisco-based New Century Healthcare Institute. "The payment scene" is uncertain, inpatient census is declining in many areas, "and both of these organizations have gone fairly far in accepting risk contracts."
San Francisco-based CHW will experience "moderate balance-sheet deterioration" in the near future, as debt-service repayment and capital spending exceed cash-flow generation, the rating agency predicted.
Moody's ratings range from a high of AAA to a low of C, and A2 is considered "a relatively strong" rating that indicates some problems on the horizon, according to healthcare analyst Lisa Martin.
By contrast, Michael Gallagher, CHW's senior vice president for public policy, characterized the lowered rating as "still extremely favorable." He predicted the 37-hospital system will borrow less money this year than in previous years.
In 1997 CHW posted net income of just $31 million on revenues of more than $3 billion, according to its annual report. That was a significant drop from its $168 million profit the previous year.
Last year's results included a $52 million loss from CHW's markets in Sacramento, Calif., and Phoenix, where it runs six hospitals and one hospital, respectively; a $9 million loss at its medical foundation, which operates several medical groups representing about 300 doctors; a $23 million loss at an unidentified Southern California hospital that discontinued tertiary-care operations in 1997; and a $24 million loss at a number of newly acquired affiliates, according to Moody's.
Gallagher declined to divulge the name of the Southern California hospital in question.
This year, the organization has posted an operating loss margin of 3.3%, Moody's said. Neither Moody's nor CHW was willing to provide details.
According to the rating agency, CHW's financial results are suffering because of revenue pressure from Medicare and commercial health plans, continuing losses at CHW-owned physician operations, and costs associated with year-2000 computer issues, which could reach $43 million next year.
At Henry Ford, meanwhile, the rating agency based its downgrade on unexpected operating losses for 1998, caused primarily by deficits in the system's medical group and northern Ohio HMO operations.
Henry Ford includes five hospitals with nearly 1,600 beds, a 550,000-enrollee HMO and a 760-physician medical group.
The system is trying various fixes including staff cutbacks, senior management salary freezes, rate increases for its Health Alliance Plan HMO and facility consolidation. It also is implementing joint ventures with other healthcare organizations and incentive compensation arrangements for physicians.
The system expects to lose $7.5 million on revenues of slightly more than $1.9 billion for 1998, said Thomas McNulty, Henry Ford's chief financial officer and senior vice president. That compares with an operating gain of $37.5 million on revenues of $1.9 billion last year. The system's fiscal year ends Dec. 31.
Hospital operations are also significantly below budget despite an admissions increase of nearly 6%, Moody's said. The system has more than 45,000 admissions annually.
Management is mindful of Henry Ford's reputation for creating the first integrated delivery system and are rethinking the system's overall strategy, McNulty said. "We're trying hard to get on top of the cure."
Henry Ford's HMO has about 45,000 enrollees in northern Ohio, where it has operated for about 10 years, McNulty said. He attributed losses there to unfavorable contracts with hospitals.
The system has been hit hard by a 10% increase in prescription drug costs and reimbursement pressures from Medicare and Medicaid.
The medical group has eliminated 22 physicians, mostly in primary care, bringing the number to 760 full-time equivalents.