Catholic Health Initiatives is bringing an operating loss of $483 million from its fiscal 2016 to its merger talks with Dignity Health, CHI reported in its year-end earnings statement Monday.
The operating loss in fiscal 2016, which ended June 30, compared with an operating surplus of $24 million in fiscal 2015.
CHI, the nation's third-largest not-for-profit hospital company by revenue, attributed the losses to “lower patient volumes, higher labor costs, increased pharmacy prices and reduced reimbursement in Medicare and Medicaid.” The Englewood, Colo.-based health system also struggled to manage the red ink from its health insurance business, which CHI plans to sell.
CHI posted revenue of $15.9 billion in fiscal 2016 versus $14.8 billion in 2015.
“The 2016 fiscal year was a challenging one for the organization—as it was for several other health systems struggling with decreased utilization and fundamental changes in the way we do business,” CHI said in a written statement.
CHI, which owns 103 hospitals in 22 states, announced its financials in the midst of merger talks with San Francisco-based Dignity Health to create a $27.8 billion behemoth that would surpass Ascension as the nation's largest not-for-profit hospital system.
CHI's struggling health plan, QualChoice Health, contributed about $110 million of the losses in 2016, the financial statements show. The sale of the health insurance operation is now being "actively marketed and is anticipated to close no later than the end of the next fiscal year," or June 30, 2017, according to bondholder documents.
Even before the Dignity talks were hatched, CHI had undertaken a major strategic initiative to reduce costs and improve revenue by about $800 million in fiscal 2017, the report shows.
CHI operates 11 multi-hospital hubs, some of which are growing while others are causing headaches. Two of CHI's trouble spots are Houston and Louisville, Ky., where difficulties melding disparate hospitals to create KentuckyOne claimed the jobs of three senior executives this summer. In Houston, the integration of six-hospital St. Luke's Health System, acquired in 2013, has gone slowly.
Dignity is dealing with its own financial problems as well. In its fiscal 2016, ended June 30, the system posted an operating loss of $63 million on $12.6 billion in revenue.
Analysts are optimistic about a CHI-Dignity tie-up because they have no geographic overlap of markets and have very diverse revenue bases.
However, both CHI and Dignity are carrying outsized debt for systems of their size. CHI has annual debt service of $460 million on $9 billion in total debt, while Dignity's debt interest is $408 million annually on total debt of $5.3 billion.
In July, CHI's deteriorating operating results prompted Fitch Ratings to downgrade CHI's debt three notches from A+ to BBB+ with a negative outlook. CHI expects to yield better results in 2017 without shortchanging necessary capital investment, the company said.
By the end of fiscal 2017, CHI anticipates it will spend $2.5 billion over five years to upgrade its information technology across all its hospitals and hundreds of physician sites. The investment is in standardizing clinical practices and quality metrics across the system, the company said in its statement.