DALLAS – Catholic Health Initiatives, one of the largest not-for-profit healthcare providers in the nation, reported a turnaround in net revenues as it continued to work toward completion of a merger with Dignity Health, officials said.

“We are definitely seeing the very positive results of a comprehensive performance improvement plan take hold,” said Dean Swindle, CHI’s president for enterprise business lines and chief financial officer. “We feel we have strong momentum for the second half of this year and through fiscal 2019.”

Mercy Regional Medical Center is an 82-bed, acute-care hospital in Durango, Colorado. It is part of Centura Health, a network sponsored by Catholic Health Initiatives and the Adventist Health System.
A CHI-affilited hospital in Durango, Colorado.

The healthcare giant based in the Denver suburb of Centennial, Colo., posted an operating loss of $1.5 million in the second quarter of its fiscal year that ended Dec. 31. The operating loss was seen as essentially break-even a year after CHI recorded a deficit of about $146 million in the same period of the previous fiscal year.

The system recorded about $215 million in net income for the quarter, a 5.3% margin attributed to a series of performance-improvement efforts that began to take effect in the second half of the previous fiscal year, said spokesman Michael Romano. The net gain, driven in large part by favorable investment returns, further reinforced a significant turnabout over the same period last year, he said, when CHI posted an overall loss of $24.5 million.

The notable improvement in results comes six years after income began to weaken amid major healthcare reform and a series of mergers. The decline in operating performance prompted a series of downgrades in CHI’s rating from the credit agencies.

In March 2017, Moody’s Investors Service lowered its rating on CHI’s $5.7 billion of rated debt to Baa1 from A3 and retained a negative outlook. CHI’s total debt at that time was about $9 billion.

Analysts said they were looking for “notable and sustainable growth in operating profits and operating cash flow” as the key to a possible upgrade. They also cited the need for a strengthening balance sheet improving the number of days of cash on hand.

CHI also generated about $282 million in operating earnings before interest, depreciation and amortization, which officials said ranks among the organization’s best three-month financial performance in several years. The 7.4% margin surpassed the 3.4% figure in the year-ago quarter, when CHI recorded $126 million in operating EBIDA.

Officials said the positive second-quarter results for fiscal 2018 were spread across the entire operation of CHI, which includes 101 hospitals and hundreds of other health care facilities in 18 states from Georgia to Oregon. The turnaround was attributed in part to several key initiatives, including a significant reduction in supply costs and purchased services, a focus on organic growth and an increase in total net patient service revenue.

In December, CHI and San Francisco-based Dignity announced plans to merge under a new name with a headquarters in Chicago.
The two Catholic health organizations have more than $14 billion in combined long-term debt, according to the most recent reports.

The two systems’ combined 2016 revenues would surpass those of the St. Louis-based Ascension Health, currently the largest non-profit healthcare system, according to data reported by Becker’s Hospital Review.

After a series of downgrades to CHI’s $8.6 billion of bonds and with a negative outlook on Dignity’s $5.5 billion of debt, S&P Global Ratings reported that the merger would have no immediate impact on either credit.

S&P downgraded CHI to BBB-plus with a stable outlook in March. The same month, S&P affirmed Dignity Health's A rating with a negative outlook.

“We said at the time that, as the smaller and higher rated organization, Dignity Health would likely be downgraded as its overall financial profile would be initially diluted. We stand by that assessment,” said analyst Martin Arrick. “Our rating outlook on CHI remains stable as this merger would be beneficial to its financial metrics and we would assume some financial synergies would be implemented post-merger, although many details are not yet available.”

Not-for-profit hospitals last year faced rising costs at a time of slower revenue growth, driving lower margins, according to a Moody’s sector report.

“Limited pricing flexibility poses a challenge as both private and public payors reduce or slow their reimbursement rate increases,” the report said. “Small independent hospitals, particularly those in rural locations, are disproportionately affected by rising costs as they compete for labor with larger wealthier hospitals.”

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