Standard & Poor's dropped the credit rating for Catholic Health Initiatives after the health system reported unexpected and significant losses in its first quarter.
The rating agency lowered the system's long-term rating to A from A+. The outlook for the Englewood, Colo.-based system is also negative, Standard & Poor's analysts said in a report, which cited the size of the system's first-quarter loss and recent failure to meet financial targets.
The health system, which operates 105 hospitals across 18 states and is expanding into health insurance markets, reported an operating loss of $134.7 million on revenue of $3.2 billion for the first quarter of its fiscal 2015. The system's recent acquisition streak—which has added 26 hospitals and two insurance companies to its operations in 2013 and 2014, according to CHI—pushed operating expenses up 11% during the first quarter compared with the same period a year ago. Meanwhile, revenue grew roughly 8% during the same period.
Standard & Poor's analysts said plans by Catholic Health Initiatives to turn around its operations likely won't be enough to avoid losses for fiscal 2015 and poor performance last year raised doubts that the system's executives will deliver the promised improvement. “It's just a big hole to dig out of,” Standard & Poor's analyst Liz Sweeney said. “They missed on their targets last year. We didn't feel like there was a strong track record to show they will do well.”
The system reported an operating loss of $14 million on $12.4 billion in revenue in fiscal 2014.
The system said in a statement that its recent investments to bolster regional growth, add physicians and enter health insurance markets were necessary to meet the demands of a changing marketplace and that efforts underway will reduce expenses.
“Catholic Health Initiatives has made a number of significant and costly strategic investments to adapt to the ever-evolving realities of the U.S. healthcare industry and to prepare for the future, so this adjustment is not unexpected,” the statement said. “The assigned rating of A affirms the strength of CHI's balance sheet.” The system plans to make additional investments, the statement said, “recognizing that a return on these investments will take time as we acquire these new capabilities and build upon a well-integrated system of regional networks.”
To slash operating expenses, Catholic Health Initiatives said it will cut 1,500 jobs through January, a move that will reduce its workforce by about 2%.
Sweeney said the system's acquisitions have weakened CHI's finances, but the strategy has also strengthened its position in several markets, including operations in Kentucky, Nebraska and the Pacific Northwest, which each generated more than $2 billion in revenue last year. The greater market share and size are an advantage, she said.
CHI bought out its partner in Nebraska's largest health system, Alegent Health, in November 2012. The system acquired three hospitals in the Pacific Northwest in 2013. The system also entered into a joint operating agreement in Kentucky that year that added operations of University Medical Center, Louisville, to KentuckyOne Health, in which CHI owns a majority stake. The system also made recent deals in Arkansas, North Dakota and Texas.
More deals are under negotiation, the Standard & Poor's rating report said.
Slower growth and more focus on operational improvement would be welcome by analysts, Sweeney said.
The system has also moved to enter the market for health insurance, which for now represents a small share of its business but a growing expense and another source of heightened risk, Sweeney said. Operations in Kentucky have weakened the system's performance, thanks in part to investment to develop a health plan, the rating report said.
Follow Melanie Evans on Twitter: @MHmevans