It might be one of the largest systems no one has ever heard of.
Springfield, Ill.-based Hospital Sisters Health System would just as soon keep it that way. By sticking to its knitting, the press-shy not-for-profit has managed to consistently grow revenues and the bottom line while keeping a lid on expenses. No doubt it remains one of the industry's best-kept financial secrets.
"The story is, they're probably one of the strongest systems in the Midwest," says Edward Malmstrom, managing director and manager of the healthcare group at Merrill Lynch, the system's investment banker. "They're small, but they're strong."
According to MODERN HEALTHCARE's 1998 Multi-unit Providers Survey, the 13-hospital system ranks among the 50 largest healthcare systems in the nation, just behind Baltimore's Johns Hopkins Health System and Dallas-based Baylor Health Care System (May 25, p. 35). Its national standing is based on 1997 net patient revenues of close to $824 million.
Hospital Sisters might have preserved its self-imposed cloak of anonymity if it hadn't emerged as one of the top 10 issuers of tax-exempt healthcare bonds in the third quarter.
Through a spokesman, Hospital Sisters' executives declined to be interviewed for this story. But the official statement detailing the system's recent bond offering paints a revealing portrait.
The system is the "sole corporate member" of Hospital Sisters Services, the Springfield-based parent of 13 acute-care hospitals in Illinois and Wisconsin. The system's sponsor is the Hospital Sisters of the Third Order of St. Francis, an order of the Roman Catholic Church dedicated to the sick and needy. The system employs some 11,228 full-timers and staffs 2,416 beds.
Hospital Sisters' flagship, St. John's Hospital in Springfield, serves as a regional trauma center and referral center for high-risk maternity cases. With 579 staffed beds, it is also the system's largest provider.
In September, the corporation and its 13 hospitals issued $188.8 million in new tax-exempt bonds, with proceeds earmarked for construction, renovation and equipment needs. The bonds are backed by Armonk, N.Y.-based MBIA Insurance Corp., which has insured the system's debt since 1986.
"I think this is one of those perfect credits that anyone would want in their portfolio," says Emmeline Rocha-Sinha, senior managing director of enterprise finance at MBIA. Although the system opts for bond insurance, she believes it would qualify for an AA rating on its own credit.
Malmstrom agrees. "Our sense is that they're an AA . . . because the numbers are pretty compelling."
For the year ended June 30, the 13 hospitals had a combined bottom line of $115.8 million on net patient revenues of $849.8 million. Total revenues-at $894 million-are up more than 7% from two years ago. System profitability has swelled 54% compared with a 1996 bottom line of $75.4 million.
Annual operating margins have never dipped below 4%, says Rocha-Sinha, "so they've been a very consistent performer."
And cash-rich. Days' cash on hand swelled to 305 this past June from 175 in 1993, according to MBIA data.
"The secret to their success lies in the ability to control their costs relative to their revenues," Rocha-Sinha says. Total operating expenses rose modestly to $854.7 million this year from $784.9 million in 1996.
As with many hospitals these days, income from operations has declined, to $39.3 million this year from $47.2 million in 1996. But Hospital Sisters makes up for shrinking returns with impressive results on investment income. Interest, dividends and net realized gains rose to $76.5 million this year, a 171% increase from two years ago.
A number of hospitals in the system enjoy strong market positions. St. John's in Springfield controls 50% of the market; St. Elizabeth in Belleville, Ill., controls 45% of its local market, Rocha-Sinha says. In Wisconsin, its two Green Bay facilities share 70% of the market.
And despite the recent debt offering, Hospital Sisters is relatively debt-averse. As of June 30, its long-term debt to capitalization stood at a low 15%. New debt bumps that measure up to just 21%. That stands up well compared with national benchmarks. The median for Aa credits rated by Moody's Investors Service is 28.2%. For all credits, the median is 37.8%.
While a number of Catholic systems are merging to get bigger, Hospital Sisters seems well-positioned to thrive on a smaller scale. Unless some significant changes occur in the markets it serves, "it's very likely that this system could continue on its own," Rocha-Sinha says.