Sacramento-based Sutter Health has been downgraded one notch to A by Fitch Ratings amid multiple lawsuits, the increased costs of seismic regulations and escalating labor costs, the rating agency said.
The rating outlook was also revised to stable from negative.
This affects $4.6 billion in long-term rated debt. The rest of the debt is operating leases and lines of credit.
Sutter Health remains among the largest healthcare systems, on par with Kaiser Permanente and CommonSpirit, with $13 billion in revenues in 2020, according to Fitch. It has 29 hospitals that serve 3 million, primarily in Northern and Central California.
The healthcare system reached agreements in two lawsuits consolidated in December 2019, one brought by California’s then-Attorney General Xavier Becerra and another brought by a class of self-funded payers, according to Fitch. The $575 million settlement deal has now received preliminary court approval and is expected to be paid in the third quarter of 2021, Fitch wrote.
The settlement agreement reached in March resolves allegations by Becerra, the United Food and Commercial Workers and Employers Benefit Trust (UEBT), and class action plaintiffs, that Sutter’s anticompetitive practices led to higher healthcare costs for consumers in Northern California compared to other places in the state. The settlement requires Sutter to pay $575 million in compensation, prohibits anticompetitive conduct, and requires Sutter to follow certain practices to restore competition in California’s healthcare markets, according to the attorney general's office.
“Today’s settlement represents a huge step toward making healthcare more accessible and affordable for patients who need it, especially for Northern California patients served by Sutter,” Becerra said in March. “This landmark settlement will require Sutter to stop practices that drive patients into more expensive health services and to operate with more transparency.”
Becerra was confirmed as the Secretary of Health and Human Services on March 18, a few weeks after the lawsuit settled.
Even before the pandemic, the healthcare system had generated material operating losses in 2020, wrote Fitch analysts, as Sutter Health’s softening margins revealed the challenges of operating in the complex and competitive Northern California market.
Sutter’s balance sheet has historically lagged expectations for its rating and it lacks the resiliency to support the previous A-plus rating, given the expectations for ongoing margin strain from escalating labor costs, as a number of collective bargaining units are due for renewal negotiations in 2021, Fitch analysts wrote. The hospital system also faces legal expenses and uncertainty from Sidibe v. Sutter Health, a separate federal antitrust lawsuit, that is headed for trial this fall.
Despite these pressures, Fitch revised the outlook to stable, saying it “reflects Fitch’s view that the system’s broad delivery of care network will remain in strong demand in its markets and that cash flow will ultimately be adequate to sustain Sutter Health’s capital and strategic investments within expectations for the A rating."
