Criteria change and insurance losses drive Northwell Health downgrade

Revised criteria for not-for-profit hospitals combined with insurance-related losses to drive a downgrade for New York State’s largest healthcare provider.

Fitch Ratings downgraded Northwell Health bonds Tuesday to A-minus from A citing its new nonprofit hospital criteria that places heightened emphasis on elevated operating risk and leverage through a rating cycle. Weaker financial results in the past two years stemming largely from its insurance plan, which is now in wind-down mode, also contributed to rating drop, according to Fitch analyst Eva Thein.

Rich Saskal

The bonds, which were issued by either Northwell or the Dormitory Authority of the State of New York, were removed from rating watch negative and assigned a stable outlook. The downgrade puts Northwell’s Fitch rating in line with its A-minus rating from S&P Global Ratings and A3 from Moody’s Investors Service.

“Historically, Northwell's profitability has been relatively thin but consistently stable, before declining in the last two fiscal years due to losses associated with the system's insurance plans,” said Thein in her report. “The insurance arm is now in a wind-down with any tail expenses in the current year having already been accrued in the 2017 fiscal year.”

Northwell opted in August to exit the health insurance business after experiencing losses in the four years since entering the sector that were mainly tied to large payments made under the Affordable Care Act’s risk-adjustment pool methodology. Fein noted that Northwell experienced losses tied to its insurance companies, CareConnect for commercial businesses and Health Plan for Medicaid enrollees, of $168 million in 2016 and $143.4 million in 2017, but expects the health system to make a return to its “historical profitability” in 2018.

“The withdrawal from the insurance business is a positive decision in the long-run,” said Fein. “Northwell’s core business has consistently demonstrated strong growth from increased volume and patient revenue, as well as strategic acquisitions.”

Fitch also factored in Northwell’s “leading market share position” and projected improved cash flow in future years into its new rating. The Long Island-based healthcare network operates 22 hospitals in the New York City metropolitan region. The company re-branded in 2015 as Northwell from its previous name, North Shore Long Island Jewish Health System.

“The downgrade was not unanticipated,” said Northwell spokesman Terry Lynam. “Our financial position remains strong and we are meeting our 2018 budget projections.”