The financial turnarounds by some not-for-profit healthcare systems last year are paying off, with improved outlooks and credit ratings among the rewards. Those actions signal lower interest costs and can translate to stronger bottom lines.
PorterCare Adventist Health System, Denver, and SSM Health Care, St. Louis, are two systems that have seen their credit ratings or outlooks improve. And they aren't alone.
In this year's first quarter, New York-based Standard & Poor's upgraded the ratings of four healthcare systems or hospitals, and in the past month has issued improved credit outlooks for at least another four, says Martin Arrick, an S&P analyst.
At Moody's Investors Service, another New York-based rating agency, seven healthcare hospitals or systems saw ratings upticks in the first quarter, compared with none in the year-ago period.
PorterCare is the minority partner in Centura Health, a nine-hospital company operated jointly with Catholic Health Initiatives, Denver. Since June 2000, S&P has upgraded three-hospital PorterCare three times. In March, S&P gave the system's rating a three-notch boost to BBB+ from BB+ for a $60 million bond issue.
In its report, S&P credited PorterCare's "excellent and improved profitability for the second year in a row."
For PorterCare, the jump to an investment-grade rating "gave us credible access to the (capital) market," says Edward Reifsnyder, the system's chief financial officer. PorterCare is using the proceeds from the March bond issue to upgrade facilities and expand two of its three hospitals in the Denver metropolitan area.
Moody's rated the bonds Baa2. In February, the firm returned PorterCare to investment grade when it upgraded $154 million in outstanding debt to Baa2 from Ba1. Moody's also removed the rating from its watch list and assigned it a positive outlook.
After posting an operating loss of $9 million on operating revenue of $295 million in the fiscal year ended June 30, 1999, PorterCare reported an operating profit of $19.9 million for the year ended June 30, 2000, on operating revenue of $332 million. For the first seven months of the current fiscal year, PorterCare is showing an operating profit of $27.3 million on operating revenue of $205 million, according to S&P.
PorterCare's improved performance, according to an S&P ratings report, is attributable to the renegotiation of its joint operating agreement with CHI and an agreement with the Adventist Health System, Winter Park, Fla., that gives Adventist the option to become PorterCare's sole corporate member (June 12, 2000, p. 14).
Although PorterCare appears to be on a roll, Reifsnyder knows there will be challenges ahead.
"Success is never final," he says. "But I am optimistic that the fundamentals are in place for PorterCare to be successful."
Another system turnaround that rating agencies have noticed is that of SSM Health Care, which completed a $240 million bond issue last week.
Both S&P and Fitch, another New York-based rating agency, assigned an AA- rating for the bonds, which SSM officials say will be used to finance a variety of capital projects and reimburse the system for previous expenditures.
In rating the bonds, S&P revised its outlook on SSM to stable from negative, saying the 19-hospital system restored profitability to its operations last year. It posted an operating profit of $11.6 million on operating revenue of $1.6 billion, compared with an operating loss of $33 million on operating revenue of $1.5 billion in 1999.
"It's just good management," says John Kenward, an S&P analyst. The agency affirmed its AA- underlying rating for the system as a whole.
An S&P ratings report credits SSM with reversing its losses by increasing inpatient utilization, renegotiating or dumping some managed-care contracts and reducing losses from their employed physicians.
Liz Alhand, SSM's senior vice president of finance, says it all comes down to growth, revenue and cost.
"It's a simple, old equation," she says. "It took us focusing on all three areas."
Although Fitch recognized SSM's operating improvements, it downgraded the system's underlying rating on its outstanding debt to AA- from AA. The agency cited the additional debt the system was taking on with its most recent bond issue.
"Had they not been assuming this additional debt they might not have been downgraded," says Fitch analyst M. Craig Kornett. "The additional debt really put a strong spotlight on their leverage situation."
According to S&P, SSM's long-term debt will rise to $960 million with the new issue.
Ratings downgrades continued to outpace upgrades in this year's first quarter, with S&P and Fitch citing financial pressures from a weaker stock market and staffing shortages (April 16, p. 34).
Although downgrades are often only one financial downturn or management misstep away, Arrick says there are reasons for optimism in the not-for-profit sector. "Without question, things are looking brighter," he says.