Catholic Health Initiatives Gives Investors an Update: Substantial Challenges Ongoing.

Senior executives from Catholic health initiatives (CHI) hosted a webcast and teleconference on May 31 to respond to questions about their FY17 3d Quarter Fiscal report. My colleagues at Insider Louisville have already commented on the update. You can read the slides that accompanied the presentation yourself. The following items were particularly significant to my listening.

1. Except that it was going to occur on July 1, nothing was said about the transfer of University of Louisville Hospital back to University control. Successful relationships with academic medical centers including at Baylor and Creighton were claimed.

2. Little was said about the sale of assets in Kentucky other than the process was “evolving,” that the company was moving with its advisors, that there is “a fair amount of interest,” and that they were “moving as quickly as possible” and “ready to move forward.” However, there has been no release of a Request For Purchase (RFP) so apparently no formal process has yet begun. I have no feeling on how rapidly things are moving or not. I suspect it will be challenging to find buyers for all the properties, certainly all at one group.

CHI will focus on regrouping around its “Legacy Lexington” facilities. I interpret this to imply that those hospitals are not currently on the chopping block. Where KentuckyOne will keep its administrative headquarters was not mentioned at this level of discussion.

3. Nothing was said about any ongoing discussions with Dignity Health other than the two companies were in the final stages of their due diligence. I suspect CHI is counting heavily on such a merger as a bail-out.

4. CHI continues to lose money nationally and its Kentucky market is in the basement in this regard. Unless I am interpreting page 23 of the slides incorrectly, for the first three quarters of fiscal year 2017 ending March 31, CHI had income “loss from operations”  of $231.6 million compared to $88.6 million in the same interval of fiscal year 2016. This represents nearly a quarter billion dollars of losses in less than a year from the core business of CHI– and this before “restructuring, impairment and other losses” (which I do not understand).  Total “loss from operations” [what is the difference?] during the same nine-month period was $424 million.  No matter how the two categories of losses are defined, it seems to me that it would be difficult to make them up on volume alone, or with a larger number of hospitals in a system.

5. To pull itself out of this hole, CHI plans to change its “footprint” such as selling its Louisville operations, find a “new balance” and to focus on “short-term results.” Few, if any specifics were offered.

6. “Labor Management” has been assigned the highest priority in turnaround efforts. This is said to be “going well,” and I presume we will be seeing more layoffs and other reductions of the labor force. CHI recognizes this process requires a “balance of cost and quality.” We in Louisville are particularly sensitive to the risks involved in cutting front-line operational employees.

7. A second priority will focus on “revenue cycle.” CHI is part-owner of Conifer, its back-office billing and collection operator. I have been told by several sources that much money is being left on the table. I read into this initiative that more emphasis will be given to billings and collections. There will likely be push-back by insurers and substantial impact on patients themselves.

8. With respect to priority number 3, “Supply chain transformation,” CHI hopes to decrease the percent of net patient service revenues spent on supplies, reducing this from about 19% in 2016 to 16%. Of course, any business has a responsibility to make its purchases in a cost-effective manner. I have no information about what industry best-practices are.

9. We should anticipate major changes in CHI’s physician enterprise as an example of things that the company “can control.” The company employs 4500 providers, but the balance is considered “not ideal.” There are “too many specialists.” I anticipate we will see “fairly significant reduction in the cost structure in the physician enterprise.” This is already happening.

8. The changes in payer mix identified as a challenge seemed chiefly to be more Medicare patients at the expense of insured patients in managed care programs, or those who purchased insurance through state insurance exchanges. The proportion of Medicaid patients is said to be stable. We are told that other large Catholic hospital chains are seeing similar shifts. If it is true that hospitals cannot turn a profit on Medicare patients, our country is in trouble. It is my understanding that many if not most hospitals have a positive Medicare margin– or at least they used to.

9. CHI plans to continue to “monetize” its real estate by selling brick-and-mortar assets to others and paying rent for continued use of the properties. Another $175 millions of property disposition is anticipated. In my mind, this short-term way of raising money is like selling your seed corn. Perhaps a reader can help us understand the pros and cons of such asset transfer in the healthcare industry.

10. The presenters could not give a specific answer to a question about plans in the bond market in near future. Listeners were told only that CHI was “continuing to evaluate the market.” One of the consequences of recent serial CHI bond downgrades is that a higher interest rate would have to be paid on any additional bonds issued. Alternatives were said to include the use of cash, variable-rate bonds, commercial paper, or other approaches beyond my ken.

Final comments.
The presentation underlying the slides took about 30 minutes with another 15 minutes for question and answer. Much of the information consisted of rather nonspecific business generalizations. Catholic Health Initiatives and KentuckyOne Health have deep holes out of which to climb. They face substantial and perhaps even existential challenges. I wish them luck.

As usual, if I have made an error in fact, please help me correct it.  If you have something to add or wish to give an alternative interpretation, please do so.

Peter Hasselbacher, MD
President, KHPI
Emeritus Professor of Medicine, UofL
5 June 2017

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