As it struggles to readjust the ill-fitting 1998 merger that created it, New York's Mount Sinai NYU Health got hit with another stress test on the threads holding it together: a slip in its credit rating on $680 million of debt.
For the second time since 1998, Standard & Poor's downgraded the four-hospital system late last month, this time to BBB- from BBB, triggering a potentially costly clause in its bond documents that requires the obligated group of three hospitals to refinance $180 million of variable rate bonds (Jan. 21, p. 22). The outlook changed to stable from negative.
In a domino effect, S&P's rating slip triggered a watch list action by Moody's Investors Service. Moody's rates the bonds Baa2 with a negative outlook. The rating actions brought to light just how much the merger has unraveled in recent months as 734-bed NYU Hospitals Center and 1,008-bed Mount Sinai Medical Center retreated to their respective campuses to realign with their medical schools (May 21, 2001, p. 24). As part of the rationale behind the downgrade, S&P observed that the decentralized system is no longer negotiating managed-care contracts as one-a major incentive behind many of the hospital mergers that defined the 1990s.
The decision to negotiate as two separate organizations was motivated by "conservatism" and was on the advice of both internal and outside counsel, said Barry Freedman, president of Mount Sinai, during a conference call last week with Theresa Bischoff, president of NYU Hospitals Center.
"With some of the restructuring we've done...and mindful of the landscape in terms of court rulings and regulatory views toward antitrust, we wanted to be conservative and not take the risk," Freedman said.
Although its overall balance sheet remains strong, the dismal operating performance at Mount Sinai, which lost $69 million on $918 million in operating revenue in 2001, has in large part dragged down NYU. The events of Sept. 11 exacerbated the situation with a $25 million collective loss for the system.
But officials at the two flagship hospitals insisted they are in it for the long haul. They still jointly engage in many activities, including information technology, patient accounts, purchasing and audit compliance, Freedman said.
"We consider ourselves part of a family of hospitals under a holding company model," Bischoff said.
From 1998 to 2001 the merger saved $30 million annually, Freedman said. The savings will still hover between $20 million and $30 million yearly under the current scenario, Bischoff said.
Meanwhile, the system is in discussions with an unnamed financial institution with a better credit rating that might be willing to underwrite the debt refinancing to eliminate additional debt expense, Bischoff said.