Catholic Health Downgraded to BBB-Plus by S&P

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DALLAS – Catholic Health Initiatives lost its A-minus rating from S&P Global Ratings Thursday as analysts lowered the credit to BBB-plus based on continuing financial pressure.

The outlook returned to stable from negative.

"The downgrade on CHI reflects a broad financial profile that is no longer consistent with the prior A-minus rating," S&P analyst Martin Arrick wrote. "And while management's current turnaround plan has created an expectation for stabilization and modest improvement over the next 18 months, it is our opinion that it will take several years on the current financial improvement trajectory for CHI to return to a higher rating."

As one of the nation's largest nonprofit health providers, CHI has about $9 billion of outstanding debt. Headquartered in suburban Denver, the system issues bonds through a variety of conduits in Colorado, Texas, and Kentucky.

CHI spokesman Michael Romano said the health system has considerable strengths, including almost $16 billion in annual revenue in the 2016 fiscal year, and a balance sheet with total assets of about $22.7 billion.

"While we are disappointed by this decision, Standard & Poor's upgraded CHI's long-term outlook from negative to stable, a positive action that reflects our financial progress in the second quarter of the 2017 fiscal year and underscores the credit agency's faith in the organization's strategic direction and performance-improvement plan," Romano said. "We expect a strengthening of our financial performance – and a strengthening of our credit profile."

Though the recent quarterly performance indicates "modest, but meaningful improvement" over the prior quarters, key financial ratios remain well below A-minus medians, Arrick said.

CHI is in merger talks with California-based Dignity Health, whose A rating S&P affirmed Thursday, but with a negative outlook.

"In our view, an affiliation with CHI, which is a lower rated entity, would most likely result in a lower rating, although an evaluation of the plan of combination would most likely inform any post-merger rating determination," Arrick wrote in the Dignity Health report.

Talks between the two health systems are continuing, Romano said.

Moody's Investors Service has a negative outlook on its A3 CHI rating, which was downgraded from A2 in May. Over the last five years, CHI has seen five downgrades as it expanded its system with the acquisition of the Houston-based St. Luke's Health System and others.

Fitch Ratings downgraded CHI to BBB-plus from A-plus in July; it assigns a negative outlook.

Romano noted that the ratings remain investment grade and that CHI "demonstrated substantial headway in the second quarter of the current fiscal year.

"A rigorous, comprehensive performance-improvement plan is expected to yield continued progress through the end of the current fiscal year on June 30," he said.

The CHI mergers coincided with others in healthcare services as providers sought greater efficiency under the Affordable Care Act. President Donald Trump and the Republican-led Congress are working to repeal and promising to replace the ACA, creating uncertainty about how hospitals should proceed.

"Periodic ratings downgrades are not unusual in the U.S. health care industry, which continues to struggle with many negative pressures in a turbulent environment marked by lower reimbursements and a shift in the fundamental way care is delivered," Romano said. "This highly volatile situation is complicated by continued uncertainty for the near future, including questions about wholesale changes in the Affordable Care Act."

A report commissioned by the American Hospital Association found that, under the most recent repeal without replacement bill, H.R. 3762, hospitals would face a net negative impact of $165.8 billion from 2018-2026.

The study also found that hospitals would suffer a loss of $289.5 billion in Medicare inflation updates if the payment reductions in the ACA are not restored. The impact of retaining the Medicare and Medicaid DSH reductions would amount to $102.9 billion.

"Losses of this magnitude cannot be sustained and will adversely impact patients' access to care, decimate hospitals' and health systems' ability to provide services, weaken local economies that hospitals help sustain and grow, and result in massive job losses," the report said.

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