Presence Health is negotiating with lenders after billing and collection failures left the Chicago-based health system in violation of its borrowing agreements.
Presence Health missed previous deadlines set by lenders to release key financial reports, but this week published unaudited financial statements that showed the system lost $185.6 million on operations last year, giving it an operating margin of -7.4%.
The system's unrestricted net assets also dropped 23% in one year. Lending agreements do not allow for a drop of more than 20%. Presence Health also came up short on a measure of income available to make debt payments, which investors require to stay above a certain threshold.
Michael Englehart, who joined Presence Health as CEO last October, said Presence hired an accounting firm and consultants to fix problems that prevented the system from collecting bills. One firm is seeking to collect outstanding bills. Another is working to improve Presence Health's billing and collection efforts. The system also misjudged the amount it would collect, using a software system designed to calculate needed financial reserves, Englehart said. The system has hired an accounting firm to address that issue.
The changes should improve Presence Health's operations by $150 million to $200 million in the next two years, Englehart said.
“We did this to ourselves,” he said. “We have a rather straightforward path to fix it.”
The botched billing also masked the fact that Presence Health was losing money on operations. The system is working to reduce its expenses, and has cut full-time employment by 200 jobs through attrition since late December, Englehart said. The system is trimming jobs from corporate and administrative services. More jobs will be eliminated, the majority of which “will occur through natural turnover,” he said.
Management was also distracted last year by the introduction of new finance and human-resources technologies, which took longer than anticipated to implement, Englehart said.
In January, the system adopted a new governance model and corporate structure, according to its latest financial statements. Presence also named an interim chief financial officer last month, after then-CFO Anthony Filer resigned in January.
Presence Health will ask its lenders for waivers for violations of its borrowing agreements. Executives plan to outline for lenders the system's plan to address the problems that led to the violations. “We are trying to be extremely transparent,” Englehart said.
The system is also at risk of a credit downgrade from Baa2 by Moody's Investors Service. "The review for downgrade will focus on Presence's quality of earnings, demonstration of internal accounting controls and processes, as well as expectations of the core operating run rate," Moody's analysts said.