Large multistate hospital systems are finally getting it right. Formed in large part during the merger and acquisition frenzy of the go-go '90s, the multistate systems, most of them Catholic-sponsored, are now flourishing after taking a more centralized approach toward operations, downsizing noncore assets and regaining their financial footing, according to a newly released report by credit-rating agency Moody's Investors Service. System governance also is being revamped.
These sprawling but centrally operated hospital systems represent healthcare's version of an old adage: Whatever failed to kill them only made them stronger.
"A lot of the mergers in the '90s were rapid acquisition strategies that may not have had the depth of financial planning that we believe they would have today because of the lessons learned," said Lisa Goldstein, senior vice president and manager of Moody's healthcare ratings group. Nevertheless, "They came out of these strategies very nicely."
Large Catholic health systems saw revenue surge last year, according to a recent review by Modern Healthcare (April 11, p. 6). "We operate our systems and hospitals with the efficiency of a leading corporation and the compassion of the Catholic Church," said Sister Carol Keehan, president and chief executive officer of the Catholic Health Association, in an e-mail. "The nation's turbulent healthcare system forces the ministry to maintain large financial reserves in order to ensure we can operate in the future."
Moody's maintains ratings on 16 multistate systems that range in size from--with 63 hospitals in 23 states and the District of Columbia--to Sisters of Charity of Leavenworth Health System, with nine hospitals in four states. Collectively, the systems represent $22 billion of outstanding debt--nearly 20% of Moody's publicly rated not-for-profit hospital debt. Thirteen of the 16 are Catholic groups.
Each multistate system grew over the past decade to more than $1 billion in revenue, compared with a Moody's review of multistate systems in 1991, when four of the 22 systems had revenue over $1 billion. While they represent the largest not-for-profit borrowers in Moody's portfolio, they are also among the strongest financially with a median high-grade rating of Aa3 compared with the national median upper-medium grade rating of A3 for the free-standing hospitals and regional systems Moody's rates.
Primarily through mergers, but also through acquisitions, closures and divestitures, Moody's portfolio fell to 16 multistate systems from 25 in 1995. Ten years ago, Moody's reported the median number of hospitals per multistate system was 10; today the median is 23 hospitals.
Multiple locations that diversify the systems' cash flow among many dispersed markets represent a key benefit to these systems, according to Moody's. Financial downturns in certain markets are offset by stronger performance in other markets. Moody's said the benefits of such geographic diversification resulted in rating upgrades for seven of the 16 systems over the past two years.
Over the next two to three years, Moody's expects increased merger and acquisition activity from these systems as well as continued improvement in fiscal performance. This time, rather than the fear of capitation, which never really materialized, mergers will be driven by clinical information technology needs, the desire for enhanced market share and the benefits of centralization. Leadership changes since the ill-fated mergers of the 1990s returned many of the multistate systems to a "back to basics" strategy so that future mergers "will be executed from a position of strength," Moody's said.
Moody's also said it expects to see hospitals again consider purchasing physician practices, a strategy from the '90s that fell out of favor but is now having a resurgence (Jan. 3, p. 8). And some of the systems--as they consolidate their power and leverage their positions--are beginning to meet the challenges of payer consolidation head-on, pursuing regional, statewide and national managed-care contracts.
Many of the multistate systems have centralized operations, developing strategies that Moody's said "are on the forefront of financial management."
The observations came as no surprise to John Strong, president and CEO of Consorta, a group purchasing organization serving faith-based organizations. "I think the reason so many (Catholic healthcare systems) have been successful is because they are focused on key operating, quality and performance initiatives, including supply chain," Strong said. "By doing so, they can gain economies that come from the centralization of functions."