Operating losses recalculated as greater than reported.
[See also Addenda of Dec 19 & 20 below]
Perhaps it was predictable, but Standard & Poor’s bond rating service downgraded its rating of Catholic Health Initiatives from A+ to A with a negative outlook based on large and unexpected losses in first quarter FY 2015, and an inability to meet the financial targets needed to deal with last year’s losses. The downgrade effects the $7 Billion of existing CHI debt for which Kentucky’s operations are also on the hook. CHI pointed to challenges in a few of its markets (particularly Kentucky) investments in capabilities, and costs in implementing computerized medical record systems.
CHI’s own “unaudited” financial report declared a $134.7 Million operating loss, but S&P recalculated this to $641 Million. Expenses were up 11% while revenues grew only by 8%. As reported by Modern Healthcare, S&P’s analyst predicted that plans by Catholic Health Initiatives to turn around its operations likely won’t be enough to avoid losses for fiscal 2015 based in part on poor performance last year— “It’s just a big hole to dig out of… They missed on their targets last year. We didn’t feel like there was a strong track record to show they will do well.”
I admitted in my own report on CHI’s losses that I had little expertise in interpreting complex financial reports, but I was quite surprised that the experts at S&P would look at the same numbers and come up with such a vastly different bottom line. I cannot explain the difference. The report itself sells for $500 which is well beyond my own bottom line.
Who is on the hook for default?
CHI itself posted a notice of the change in its bond rating along with a list of 48 different outstanding bond issues. Of these, 8 were issued under the authority of either Louisville/Jefferson County Metro Government, or the the Kentucky Economic Development Finance Authority to the tune of $674.6 Million. Six of these were issued after the partnership of CHI with UofL became active, or at a time these governmental agencies were aware of UofL’s plans. No wonder both state and local government leaders were present as advocates at the announcement of the partnership. The timing of these bond issues makes me wonder if the bonds were issued in support of UofL’s intended or perhaps presupposed merger, or simply in support of Jewish and St. Mary’s Hospitals which were having problems at the time. Or did CHI simply assume responsibility for bonds issued under different names or titles?
This seems scary to me? Is Kentucky underwriting CHI’s expansion efforts? Do I have a right to be nervous? Who can fill us in on the details of the bond issues, or inform us the extent to which Kentucky taxpayers or the University system will have to pay for any defaults? I have in mind the extra tax dollars going to pay for Louisville’s downtown arena that were said to be only a remote, just-in-case possibility— more public dollars for essentially private interests.
Not good news by any measure.
This must be disappointing news for KentuckyOne Health, CHI’s operating arm in Kentucky, and for the University of Louisville which transplanted itself to KentuckyOne at the hip and expected huge infusions of cash for its academic and commercial enterprises. CHI has been on a buying and acquisition binge over the past few years. What remains to be seen is if it can successfully consolidate and streamline a disparate constellation of facilities while simultaneously adding the insurance business it desires; or whether it is inflating a healthcare bubble that will eventually burst. Despite attempts to put on a brave face, the outcome is uncertain at best.
Help me make any corrections, and add your expertise.
Peter Hasselbacher, MD
Emeritus Professor, UofL
17 Dec 2014