Cost savings initiatives from the merger creating CommonSpirit Health are gaining traction, although with a "slower start," the system's finance chief said on an investor call Thursday.
The Chicago-based system previously had reported a year-over-year operating loss of $227 million in the first quarter of fiscal 2020, which ended Sept. 30, on $7.2 billion in operating revenue, up sharply from the operating loss of $56 million reported for a year earlier.
Now, CommonSpirit's leadership is focused on the sizable task of digesting the 142-hospital merger and achieving its goal of $2 billion in savings over the next four years.
They're also under pressure to explain why progress isn't happening more quickly. Analysts peppered CommonSpirit executives with questions about when the savings would start to show up and how specific future updates will be.
"We want to assure you, and the organization is well aware, of the fact that we have made a commitment to our $2 billion in synergies," Dan Morissette, CommonSpirit's CFO, said on the call. "We are all about understanding the work that's necessary over the next 3 to 4 years to make sure that this is realized."
CommonSpirit has cautioned that such savings take time, but the market expects to see some improvement in fiscal 2020, perhaps even in the first quarter, said Olga Beck, a senior director with Fitch Ratings.
"I think there was definitely some pressure of, 'We've been talking about it for a few quarters. When do we start to see it?'" she said.
Morissette made it clear the not-for-profit health system does not plan to share dollar amounts with respect to progress toward the $2 billion goal. Two analysts asked for that information, and Morissette said the savings will instead be reflected in CommonSpirit's overall financial results.
Investment analyst Robert Stackhouse remarked on the call that the planning behind CommonSpirit's cost-saving strategies seemed to take longer than expected. He questioned why such work seems to have happened only recently, as opposed to during the more than two-year due diligence process, which wrapped up in February.
Morissette responded that CommonSpirit is on track with where it expected to be and has good momentum.
Lots of people are watching CommonSpirit's progress toward meeting its savings goal, Ken Gacka, senior director and analytical manager for S&P Global Ratings, said in an interview.
"It's not surprising to see that's where a lot of the eyes are, particularly as they've been consistent in the messaging that their margins aren't where they need them to be long-term," he said.
Much of the discussion centered on the continued challenges in CommonSpirit's Texas market, where Baylor St. Luke's Medical Center is working to recover from reports of high rates of deaths and complications for heart, liver and lung transplants as well as poor outcomes for heart bypass surgery patients.
Morissette reminded investors and analysts that Baylor St. Luke's has an entirely new leadership team that has taken a number of corrective steps. He also said the CMS has done a full-scale review of the hospital.
"We too are disappointed with the overall results there, but we are confident that we have the right plan in place to improve those results," he said.
One step is rebuilding confidence with physicians who have left the Houston hospital. That will be a "multifaceted process," Morissette said.
"Sadly, as you know, it takes time to rebuild these things, but we are confident we will be successful," he said.
S&P is among those "anxiously waiting" to see progress in the Texas market, Gacka said. The agency noted in its inaugural rating for CommonSpirit that its performance will likely get worse before it gets better.
Lisa Zuckerman, CommonSpirit's senior vice president of treasury and strategic investments, said leadership was "thrilled" with the outcome of CommonSpirit's latest debt restructuring, which, among other benefits, significantly lowered the portfolio's risk. The $6.5 billion deal generated $330 million in net present value savings on tax-exempt bonds, $1.4 billion in near-term cash flow relief and $600 million in reimbursement for capital expenditures.
In fiscal 2020, the majority of the savings opportunities are in corporate functions, purchased services and division operating improvements, Morissette said. Of CommonSpirit's $2 billion goal, half is expected to come from merger-related synergies and half from performance improvement across its hospitals and physician practices. The health system is currently focused on right-sizing its staff, consolidating leases and integrating clinical engineering programs, he said.
CommonSpirit also plans to pick a single group purchasing organization in the coming months, which Morissette said will generate significant financial improvement on a run-rate basis. Currently, legacy Catholic Health Initiatives facilities use HealthTrust, while legacy Dignity Health facilities use Premier, Inc. They will continue to use the separate GPOs until sometime during the second half of fiscal 2020, CommonSpirit spokesman Michael Romano wrote in an email.
Most municipal bond issuers in healthcare don't host quarterly investor calls, but it's a best practice when it comes to very large organizations like CommonSpirit, Gacka said.
"You have a wide investor base, a lot of interest, a lot of activity in your bonds," he said. "I think on the larger end of the spectrum, you would want to see this. It's a best practice which they follow."
