Baptist Health, Louisville, Ky., saw its credit rating lowered one notch after struggling against lower utilization and challenges integrating newly acquired physician groups and facilities.
Fitch Ratings this week downgraded Baptist's rating on three series of bonds to A+ from AA-.
The agency cited the system's declining profitability over the last two years, as well as losses at two recently acquired hospitals. It added that another “major concern” remains subsidies to its employed physicians.
Baptist is expected to report a loss of $26.3 million in fiscal 2013, which has an Aug. 31 year-end.
Carl Herde, Baptist's chief financial officer, attributed the system's weak financial performance to lower utilization—something most healthcare providers are experiencing and has been particularly acute in Kentucky, which was hard-hit by the economic downturn. The system has also made capital expenditures, investing in new systems to prepare for ICD-10.
And then there were the acquisitions. In 2012, Baptist purchased Baptist Health Richmond and Baptist Health Madisonville and committed to capital improvements in their facilities.
Baptist also added 60 physicians in fiscal 2013, a move that Fitch expects will yield losses of $89 million. The loss from its five physician groups is projected to increase to $109 million in 2014.
But Herde described its acquisitions as a “long-term proposition”—an expensive investment but a necessary one as it moves toward population health management. “This is the cost associated with employing physicians in this market,” he said.
The system recently tapped Huron Consulting Group to help improve its operating margins.
With roughly half of its costs coming from labor, Baptist is working to increase back-office efficiencies and consolidate leadership and supervisory positions, largely through attrition. It is also focused on capturing more revenue and shoring up payer contracts to increase reimbursement rates.
Herde said Baptist's financials are improving, noting that the projected loss for the full year is smaller than the $28.1 million loss the system saw in the third quarter, when it had a negative operating margin of 2%.
“We're very strong financially,” he said. “We think we can take a methodical approach.”
Follow Beth Kutscher on Twitter: @MHbkutscher
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