Standard & Poor’s changed its outlook on the Daughters of Charity Health System to negative due to ongoing losses.

“Operating losses at DCHS accelerated in 2010 and have continued through the first quarter of fiscal 2011 at a higher pace,” said analyst Cynthia Keller.

The credit agency affirmed its BBB long-term rating on the system’s $463 million of fixed-rate bonds, which were issued by the California Statewide Communities Development Authority.

It said the negative outlook reflects its belief that a turnaround for the hospitals will be challenging because of the mission-driven nature of the system and regional economic pressures.

Standard & Poor’s noted that the system’s payer mix is constrained, with the majority of its reimbursement coming from the state and federal government, both of which have significant budget pressures of their own.

Due to the rising losses, Standard & Poor’s said the hospital system has decided to move towards more centralized management in an effort to decrease fixed costs and has hired consultants to help with the changes.

Standard & Poor’s said a myriad of financial and operating issues will need to be clarified over the next year, including labor issues, the level of support from the hospital’s foundation, and plans to address seismic-safety needs.

“Losses at 2010 and 2011 levels are inconsistent with the current rating level, regardless of our assessment of the degree of foundation support,” Keller said in a statement. “For the outlook to return to stable, we will consider whether the system successfully implements fundamental changes to its cost structure to compensate for volume and revenue decline.”

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