In an industry that's been rapidly consolidating, Catholic Health Initiatives has had a particularly rapid growth trajectory.
But the Englewood, Colo.-based system has incurred costs associated with acquiring new hospitals and has struggled to keep them in check. Its latest earnings report for its fiscal third quarter, which came out Monday, highlights the challenges systems face as they build size and scale.
Yet the system has also shown it is strengthening its core business, which could bode well for its full-year results, analysts said.
Fiscal 2014 had marked the fourth consecutive year of declining financial performance for CHI, which earned it three consecutive one-notch credit rating downgrades from Moody's Investors Service.
But its earnings reports for the first half of 2015 suggested that the system had finally managed to get the upper hand on its expenses. It also launched a systemwide restructuring initiative that aims to cut costs from its corporate office and several regions.
Yet the road is still bumpy. In the third quarter, CHI reported that its expenses were once again growing faster than revenue, which it attributed primarily to acquisitions.
CHI executives were not available for comment at deadline.
The system has expanded with a regional focus, adding health systems in markets like Texas, where it has built a significant network in less than two years, according to Jennifer Kim, an analyst at Fitch Ratings.
But more acquisitions have meant more debt. “When CHI takes on new acquisitions, they tend to refund all of the new members' outstanding debt,” she said. “It's expensive.”
That strategy is one reason why CHI also has experienced more negative rating movement than its peers Ascension and Dignity Health, she added.
Fitch in December affirmed CHI's A+ rating but revised the outlook to negative.
CHI's increased debt load—which more than doubled between 2011 and 2014—was also a factor in Moody's January rating downgrade to A2, said Moody's analyst Bradley Spielman.
It's not unusual for stronger systems to see a ratings downgrade after a merger or acquisition. After Trinity Health merged with Catholic Health East, both systems got a ratings adjustment from Moody's and Standard & Poor's. Higher-rated Trinity was downgraded while CHE saw an upgrade so that both partners had the same credit rating.
But the opposite could also occur, Spielman said, pointing to the merger between St. Joseph Health in Irvine, Calif., and higher-rated Hoag. St. Joseph saw a rating upgrade after the combination.
Spielman acknowledged that CHI is going through a “prolonged transition period,” but added that the system has presented a turnaround strategy to right the ship. The system also remains on track for finishing fiscal 2015 in a better financial position than the previous year.
“We're not expecting them to perform miracles,” Spielman said. “They do have some challenges that they're working through.”
Those challenges include a contract dispute with Nebraska's Blue Cross and Blue Shield plan, which depressed revenue in that market.
CHI's results also were affected by higher depreciation costs, a noncash item, Kim said. But she added that other metrics, such as cash generation and its ability to repay debt, were in line with expectations.
“It's part growing pains (but) the trend in their core operations is not outside what we expected,” she said. “It's revenue diversity in action.”
(This story has been updated with a clarification. A previous version included losses attributed to acquisitions based on pro forma results calculated from prior-year financial results.)