Fitch Ratings has lowered the credit rating of Catholic Health Initiatives by three notches, citing the integrated health system's weaker financial profile, while A.M. Best Co. downgraded CHI's health insurance subsidiary.
CHI, a national system headquartered in Englewood, Colo., closed the books on the first nine months of its fiscal year with a net loss of $568.1 million. Health IT costs, investment losses and troubles with its health insurance company spearheaded the massive deficit. CHI's credit rating from Fitch, which covers $6 billion of outstanding debt, now sits at BBB+ from A+.
Moody's Investors Service (PDF) and Standard & Poor's Ratings Service (PDF) each downgraded CHI's bond ratings earlier this year.
A.M. Best Co., a separate rating agency, also downgraded the credit rating this week of CHI's health insurance company, QualChoice Health, also known as QCA Health Plan. QualChoice is on the block to be sold. A.M. Best analysts said that announcement “indicates declined strategic importance of QCA to its parent.”
CHI executives recently told bondholders that they “decided to exit the health insurance business” after undergoing a strategic review. Dean Swindle, CHI's chief financial officer, explained during an earnings call last week that a more complete analysis will be finished by September.
Aside from the high claims costs associated with the health insurance subsidiary, CHI has struggled to save money and improve operations from some recent acquisitions, Fitch analysts said in their downgrade report. CHI bought a large hospital system in Texas in 2013 and has grown its footprint to more than 100 hospitals across 18 states, but experts believe the system may have tried to grow too much, too quickly.
As of March 31, CHI had an operating margin of negative 4.3%, according to Fitch's specific calculations. Hospital systems with an A credit rating from Fitch have a median operating margin of 3.6%.
Fitch believes CHI “may need two to three years to fully implement its financial turnaround plan as it is working on multiple initiatives concurrently.” High labor and supply costs, as well as difficult collections from the rising number of patients with high-deductible health plans, pose additional challenges for the hospital system, Fitch analysts said.
Swindle sent a statement to Modern Healthcare saying CHI was “disappointed by the decision, but encouraged by Fitch's belief that CHI's strategy to build the size and scale necessary for valued-based programs is appropriate. Swindle also said, “Adjustments by rating agencies in a difficult, ever-changing environment have been a common occurrence. Despite the many challenges faced over the last five years, CHI retains investment-grade ratings from all three agencies.”
Later this year, CHI anticipates it will restructure $2.4 billion of its outstanding debt (PDF) to “take advantage of today's attractive market conditions.”
