In the ongoing rush of healthcare deals, perhaps no other health system has been as aggressive as Catholic Health Initiatives, which has executed a dozen transactions in the past three years that have expanded its operations into health insurance and established a $1 billion foothold in Texas.
But the not-for-profit Catholic system's latest financial results show its growth comes with costs beyond the price of buying hospitals and insurers and paying off debt. The system's recent weak financial results underscore the financial risks that can accompany the potential promise of healthcare consolidation.
In recent deals, CHI has expanded its reach in Kentucky, acquired Nebraska's largest health system, added hospitals in Arkansas, Ohio and Washington state, and entered Texas with the $1.2 billion acquisition of six-hospital St. Luke's Health System. Subsequent deals have swelled its Texas operations to include 13 hospitals. The system became majority owner of a Medicare Advantage plan in early 2013 and acquired a commercial insurer last summer.
The deals have put financial strain on the system. While revenue has surged with the expansion, growing from $9.8 billion in 2012 to $13.9 billion last year, expenses also have soared. Last week, the system reported a large, unexpected operating loss for its fiscal first quarter, which ended Sept. 30, and officials said they would cut the system's workforce by 2%. Acquisitions largely drove the 11% increase in expenses during the first quarter compared with the same period a year ago, according to financial statements. Revenues grew roughly 8% during the same period.
CHI's debt soared from $6.1 billion in 2012 to $8.4 billion in 2014. Operating losses in the past two years have replaced profit margins that averaged 3% in the five prior years. The system lost $134.7 million on revenue of $3.2 billion in the first quarter after losing $14 million on revenue of $13.9 billion all of last year. The system's first-quarter loss prompted Standard & Poor's to drop CHI's rating by a notch.
Fitch Ratings left Catholic Health Initiatives' rating unchanged at A+, but lowered its outlook to negative. Fitch described the growth strategy as “appropriate,” but said the system's weak operating performance could drag down its credit unless executives correct it.
“It's a big hole to dig out of,” said Liz Sweeney, a director with rating agency Standard & Poor's.
CHI has invested $1.7 billion to install electronic health records across its growing operations and is expected to spend at least another $800 million on EHRs. Buying and expanding health plans to operate in six states has drained cash from the balance sheet and added new operating expenses. Hiring doctors, other providers and IT professionals has added to labor costs as the system seeks to build networks that reach beyond hospitals to clinics, nursing homes and other settings.
CHI officials contend the investments and growth are necessary as healthcare reform and continued pressure to slow healthcare spending reshape the marketplace. The investments will create broad regional networks of providers that can be marketed to employers and consumers under the system's own health plans. CHI's health plans have expanded their operations into four more states, with intentions to enter all of the system's major markets.