Efforts by Chicago-based CommonSpirit Health to ride out the pandemic and integrate its two massive healthcare systems following a 2019 merger have resulted in a ratings upgrade from S&P Global Ratings and a revised outlook to positive from Fitch Ratings.
S&P boosted the rating to A-minus from BBB-plus citing CommonSpirit’s progress in integrating the operations of its founding organizations, continued identification of cost efficiencies, its strong management team and strategic operating approach.
“The rating action reflects our view of the successful execution of several aspects of CommonSpirit’s initial strategies in stemming losses and setting the system up for stability as well as a significantly strengthened balance sheet that provides the organization some cushion for operations that we expect to be at or near break-even in fiscal 2022,” S&P analysts wrote in Friday’s report.
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The healthcare system's leadership gets asked a lot why it chose to locate in Chicago, said CFO Dan Morissette.
"We are a national company and Chicago is the spot right in the middle of the country," Morissette said. "We also thought we are a new company, let's start fresh in a new spot."
Though the company is always looking for a new opportunities, it has had no serious discussions about acquiring hospitals in Chicago or Illinois, he said.
It did, however, acquire hospitals in Seattle and Arizona, transactions that took place at the height of the pandemic.
"Those two are in two of our most important markets — the Pacific Northwest and Arizona," he said. "We are really enthused about both of them, the integration has gone really well."
The company is slightly ahead of plans to integrate Dignity and CHI, which was a factor in the improved outlook and ratings boost.
"We are in a very challenging environment given the pandemic, but we were able to do the things we had planned operationally when the merger was conceived," Morissette said.
CommonSpirit has successfully simplified and de-risked its debt portfolio; restructured its leadership model, including transitioning to a single CFO at the end of fiscal 2020; consolidated its investment portfolio; evaluated its presence across markets that included exiting some markets, while entering others and generated operating efficiencies, S&P analysts wrote.
The healthcare system recorded an operating income gain of $34 million, a 0.4% margin, for its fiscal 2022 first quarter, compared to the same time a year prior. The increase was attributed to higher patient volumes, rate changes and new hospitals joining the system.
“Given the circumstances this was a very solid quarter for the organization,” Morissette said. “No doubt there is more room for improvement and growth. But when considering the impacts from the Delta surge, increased labor and supply costs, and the lack of government aid compared to the prior year, we’re pleased to have achieved a measure of financial stability.”
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Fitch Ratings analysts said in Monday's report that the system’s revenue and geographic diversity suggest an upgrade “may be possible even if profitability and balance sheet metrics lag the medians for the A rating category.”
“Fitch’s analytic focus since CommonSpirit’s initial financing in 2019 has been concentrated on tracking the system’s ability to deliver on its plans to realize synergies and build a sustained track record of improved profitability within three to five years,” Fitch analysts wrote. “Fitch believes that fiscal 2021 (ended June 30) demonstrates the system’s first discernible progress toward its financial goals with an operating margin of 2.8% and operating EBITDA margin of 8.7%, in addition to material improvement in unrestricted cash to $17.7 billion as of fiscal year end 2021, compared to $12.8 billion as of FYE 2020.”
Fitch analysts added a caveat, saying: “Despite our belief that the system has been successfully working on system alignment, portfolio optimization and standardization to create an effective operating model, Fitch recognizes that the results in 2021 are not sustainable in the short to mid-term.”
Fitch “does not anticipate that CommonSpirit will generate consistent operating EBIDTA of 8% or above for at least another three to four years.” Analysts said they are expecting operating EBIDTA in a band of roughly 6.5% to 7.5% over the next four years.
S&P pointed to the healthcare system’s improved financial performance in 2021 with the receipt of CARES Act funds and ongoing supplemental funds and $500 million of performance initiatives in its ratings boost.
“The organization has hit many of its financial targets around the balance sheet ahead of its forecast, and we view this favorably,” S&P analysts wrote.
S&P also viewed the acquisition of Yavapai Regional Medical Center in Arizona and Virginia Mason Health System in Seattle favorably.
“We expect other potential acquisitions and divestitures to further strengthen the system as a whole, although none that are currently being contemplated are significantly large in size,” S&P analysts wrote.
