A perfect storm of operating declines, merger costs and impairment charges culminated in a $602 million operating loss in CommonSpirit Health's first annual financial report as a merged health system.
The 142-hospital, Chicago-based system, formed through a February 1 merger, is currently working through the gargantuan task of combining two already large health systems, Catholic Health Initiatives and Dignity Health, in parallel with a performance improvement plan designed to save $2 billion over four years.
"We know this is not an easy task and that we face challenges in the near term, which is why we are investing in a strong, disciplined business model that will help the organization evolve to meet the changing health care needs of our communities," CommonSpirit co-CEO Lloyd Dean said in a statement.
CommonSpirit's $602 million operating loss on $21 billion in operating revenue in its fiscal 2019, which ended June 30, is compared with a $267 million operating loss on $15 billion in operating revenue in fiscal 2018. On a pro forma basis that includes 12 months from both organizations, CommonSpirit's operating loss was $582 million on $28.9 billion in revenue in fiscal 2019, compared with a $244 million operating gain on $29.2 billion in operating revenue in fiscal 2018.
In addition to the $2 billion in cost savings, CommonSpirit has set a goal of reaching an 8% earnings before interest, depreciation and amortization margin in four years. To get there, the health system is implementing a strong, systemwide operating model and focusing on its growth strategy of providing preventive care and customized services, Dan Morissette, CommonSpirit's chief financial officer, said in an interview.
"We're not where we want to be in terms of performance," he said, "but these opportunities are real and they will begin to be realized here and will help our numbers get to the point where we can reach our goal of 8% EBIDA over the next four years."
CommonSpirit spokesman Michael Romano said the health system believes the pro forma results, which exclude acquisition costs, are more accurate because the actual results for fiscal 2019 do not include Dignity's pre-merger results.
More than half of the operating loss—62% excluding acquisition adjustments—was due to special charges and other costs, which Morrissette explained includes merger-related costs and accounting rules around closed pension plans, among other items.
CommonSpirit reported $9 billion in excess revenues over expenses in its fiscal 2019, far higher than the $194 million in fiscal 2018. That's largely because of accounting rules for the type of merger executed that required the fair market value of Dignity's net assets, roughly $9 billion, to be reported there, Morissette said.
On the volumes front, CommonSpirit said its outpatient visits grew 1.5% on a same-store basis in fiscal 2019 year-over-year, while adjusted admissions declined 0.1% in that time. Excluding the California provider fee, CommonSpirit said net patient and premium revenue per adjusted admission increased 2.2%.
CommonSpirit's longterm debt stood at $13.5 billion as of June 30. In August, the health system completed what Morissette described as a "very successful" bond issuance of $6.4 billion. The offering, first announced in April, yielded $600 million in new money that went toward cash and investments.
S&P Global Ratings noted in its inaugural CommonSpirit bond rating that the health system's performance will likely decline initially before ultimately improving. The report said CommonSpirit still struggles in key markets, including its remaining Louisville, Ky., operations, which are held for sale but continue to lose money and its Texas market, which includes its joint interest in Baylor St. Luke's Medical Center.
Morissette said he expects to close the sale on the Kentucky operations soon. He also said CommonSpirit has the right plan to improve its finances in Texas.
S&P rated CommonSpirit's bonds BBB+, which represented a downgrade for Dignity, which had previously been rated A.
CommonSpirit spent $322 million providing charity care to patients in fiscal 2019, compared with $244 million in fiscal 2018, figures that include both continuing and discontinued operations.
CommonSpirit has facilities in 21 states. The system has about 150,000 employees and 25,000 physicians and advanced practice clinicians.
