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May 22, 2017 01:00 AM

CHI hopes cutting Louisville hospitals will further boost earnings

Dave Barkholz
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    Catholic Health Initiatives halved its operating losses to $40.1 million in the third quarter of fiscal 2017, the hospital giant said in a financial disclosure that detailed why it plans to divest its money-losing Louisville hospitals.

    The financial disclosure showed that KentuckyOne's Louisville hospitals posted an operating loss in the quarter of $12.7 million on revenue of $231 million compared with an operating loss of $23.8 milion in the same quarter the year prior.

    CHI, the nation's third-largest not-for-profit hospital system, announced this month that its operating subsidiary, KentuckyOne Health, is selling most of its Louisville operations to stem losses there. KentuckyOne CEO Ruth Brinkley also resigned last week in the face of that performance.

    KentuckyOne said last week that it is seeking buyers for 10 of its facilities across the state. KentuckyOne will focus its attention going forward on its markets in Lexington and eastern Kentucky.

    In its disclosure, CHI estimated the value of the assets being divested in Louisville at $534.9 million.

    Earnings in CHI's fiscal third quarter would have been significantly better without losses in CHI's Louisville operations.

    CHI posted $325 million in third-quarter earnings before interest, depreciation and amortization, excluding one-time items.

    That's a 31% gain compared with the year-ago period. And it builds on EBIDA that totaled $122 million in CHI's fiscal first quarter and $210 million in the second quarter.

    "The first three quarters—and March, in particular—demonstrated that we are on track for substantial improvement in our financial situation as we near the end of the 2017 fiscal year," said Dean Swindle, CHI's president for enterprise business lines and chief financial officer.

    As a whole, CHI saw some improvements as its focus on reducing labor and supply expenses gained traction, the health system said.

    Englewood, Col.-based CHI owns 104 hospitals in 17 states.

    The system is undertaking the turnaround as it continues affiliation talks with San Francisco-based Dignity Health. If that resulted in a full merger, it would create the nation's largest Catholic hospital system with more than 140 hospitals and annual revenue of about $28 billion.

    CHI noted in its third-quarter earnings that it expects to report a one-time $279.4 million loss when KentuckyOne and the University of Louisville Hospital on July 1 sever a joint operating agreement under which KentuckyOne has managed the academic hospital system, the disclosure noted.

    The joint operating agreement has been a moneymaker. For the nine months ended March 31, the partnership reported operating income of $13.1 million on revenue of $382 million.

    CHI's hospitals in Colorado, Ohio and Tennessee led the third-quarter operating improvement with each division posting operating EBIDA margins in excess of 10%, CHI said.

    The systemwide quarterly operating loss of $40.1 million compared with an operating loss of $81.6 million in the year-earlier quarter.

    CHI also posted investments gains in the third quarter of more than $203 million—a nearly 12-fold increase over the previous three-month period, CHI noted.

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