One month after Baylor Scott & White Health came together to create the largest not-for-profit system in Texas, the challenges of integrating two systems has dragged down the ratings outlook for both systems.
In separate reports, Moody's Investors Service revised the outlook on Baylor Health Care System and Scott & White—still two distinct obligated groups—to negative.
For Scott & White, the challenges include new hospital construction, a “very weak” operating cash-flow margin compared to its peers, flat volume and an increasingly adverse payer mix. Moody's also cited its high debt load in relation to revenue and cash flow, and continued capital spending on a new hospital in Marble Falls and the implementation of a costly electronic health-record system.
For Baylor, the outlook comes down to execution risk in improving the balance sheet of its new partner.
The deal, which closed Oct. 1, created a system with $8.3 billion in assets and 43 hospitals, including joint ventures. Both organizations serve distinct geographic territories. Baylor is located in the competitive Dallas market, where it is second in market share to Texas Health Resources. Scott & White's hospitals are located about 100 to 200 miles south, where they see competition from medical centers in Waco and Austin.
In a statement, Scott & White President and CEO Dr. Robert Pryor said certain factors that influenced its rating—including lower utilization, a shift in payer mix and the move to an EHR system—are not unique to the system.
But he acknowledged that Scott & White has incurred significant costs associated with building a new hospital and clinic in College Station and a new children's hospital and medical office building in Temple, as well as adding beds at its hospital in Round Rock.
“Our continued expansion is critical as we work to meet the needs of the growing communities we serve through our population health model,” he said. “While our recent combination with Baylor Health Care System will increase the strength of both organizations, integration takes time.”
Joel Allison, CEO of Baylor Scott & White Health, said the fact that Moody's reaffirmed its Aa3 rating is proof of its strong performance amid “tremendous industry pressures and in one of the most competitive healthcare markets in the country.” Moody's also reaffirmed Scott & White's A1 rating.
“While the combination will ultimately further enhance over time the financial position and operating performance of both organizations, there are typical execution risks associated with a deal of this magnitude in an immediate sense,” he added in a statement. “The board and management of the new parent, Baylor Scott & White Health, are focused on a successful and timely integration to continue to provide safe, quality, compassionate health care to the growing number communities we serve.”
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