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S&P lowers KershawHealth bond rating to BBB-

Posted: December 12, 2013 3:56 p.m.
Updated: December 13, 2013 5:00 a.m.

Standard & Poor’s Ratings Services lowered its long-term rating to ‘BBB-’ from ‘BBB’ on South Carolina Jobs Economic Development Authority’s $19.6 million series 2008 hospital revenue bonds issued for KershawHealth. The outlook is negative.

“The lower rating reflects KershawHealth’s continued weak and below-budget operating performance over the past two years,” S&P Credit Analyst Stephen Infranco said in a press release Wednesday.

Infranco said the downgrade also reflects S&P’s assessment of KershawHealth’s operating pressure in fiscal 2013, limited revenue flexibility, and declining business volumes, offset by its good business position and strong balance sheet metrics for the rating level.

“The negative outlook reflects our opinion that operations could continue to be pressured by a constrained reimbursement environment and soft business volumes,” Infranco added.

He said while S&P believes management will address some of the challenges through cost-saving initiatives, the fiscal 2014 budget indicates some continued stress with an operating deficit expected. The rating is supported by KershawHealth’s good business position and some strong balance sheet metrics for the rating level, including strong debt liquidity and low leverage.

However, Infranco said S&P could lower the rating if the economic challenges and difficult reimbursement environment continue to pressure business volumes and financial performance, coverage doesn’t improve to 1.5 times or greater, or if days cash on hand approaches 100 days or lower. Furthermore, any additional debt without improving cash flow and growth in unrestricted reserves could result in a lower rating.

Because of the current operating pressure, Infranco said S&P does not expect to raise the rating within the two-year outlook period. However, he said it would consider a revision to a stable outlook if KershawHealth can demonstrate sustained improvement in operations over a multi-year period. Furthermore, Infranco said S&P expects that KershawHealth will maintain its solid business position and that the relationship with Palmetto Health should allow for greater efficiencies and help improve quality and safety metrics across service lines.

For some time, and as the Chronicle-Independent has frequently reported, the administration has reported each month to the KershawHealth Board of Trustees about a number of factors impacting KershawHealth’s financial performance.

“Chief among these have been significant decreases in key patient volumes, including inpatient admissions and surgical cases,” KershawHealth Executive Vice President and COO/CFO Mike Bunch said Wednesday. “Additionally, we experienced continued growth in bad debt and charity care, both of which are directly related to KershawHealth’s mission to provide care for everyone, regardless of their ability to pay. Finally, there has been a significant decline in reimbursement for the care we provide, especially from Medicare and Medicaid, which together account for a very large number of our patients.”

In mid-November, Bunch reported on KershawHealth’s year-end statements for Fiscal Year 2013, which ended Sept. 30. Those financials -- considered unofficial until an audit is conducted -- showed that KershawHealth suffered a $3.62 million operating loss. KershawHealth had budgeted for a loss in FY 2013, but only of $494,000 after projecting operating gains of $726,000 offset by interest expenses of $1.22 million.

Such losses are expected to continue for some time. Bunch reported to trustees in late June that -- if gross patient revenues stay flat and the state of South Carolina continues its stance of not expanding Medicaid -- KershawHealth could expect to lose nearly $32 million by FY 2018. Trustees attending that meeting said while the healthcare systems was in “dire straits,” KershawHealth was already working to deal with such impacts.

In an additional written statement provided Thursday to the C-I, Bunch and KershawHealth Interim CEO Terry Gunn said KershawHealth is taking steps to both reduce expenses and to increase revenue, steps they said would lead to improved financial performance.

“It’s going to take both of those to get KershawHealth where it needs to be,” Gunn said.

Bunch noted that on the expense side of the equation, there are a number of specific efforts underway -- related to staffing, purchasing and the revenue cycle.

“We are varying our staffing level more than in the past to adjust to fluctuating patient volumes,” Bunch said. “We’re focusing on the idea of ‘right staffing,’ where we have the right type and number of staff to provide excellent care for the patients we have at any given time.

Bunch said KershawHealth has also officially entered into a large purchasing group with Palmetto Health and Greenville Health System that is expected to provide savings quickly.

Finally, Bunch said KershawHealth is constantly working to improve its revenue cycle.

“We’re doing everything we can to shorten the time between when we provide care and when we receive final and full payment of those services,” Bunch said.

Equally as important as containing expenses, KershawHealth Vice President of Marketing and Community Outreach Joseph Bruce said, is growing revenue.

“With the arrival of Terry Gunn as interim CEO, there will be a concerted effort to rebuild patient volume in key areas where we have lost ground,” Bruce said, adding that there also be an increased focus on identifying KershawHealth’s strengths and building on those to increase revenue. “A concentration on building the revenue side has been a hallmark of Terry’s leadership at other hospitals, and he has successfully partnered with physicians to build patient volume in key areas at those organizations.

Gunn noted that KershawHealth is experiencing the same financial challenges faced by many other community healthcare systems.

“We are working with a sense of urgency to increase patient volumes and be good stewards of our expenses,” Gunn said. “We can and will move forward quickly to develop strategic initiatives to improve our financial outlook and continue to serve the community.

In a separate press release issued Wednesday, S&P itself noted that negative trends may catch up to nonprofit hospitals and health systems in a “big way” next year, saying its outlook for that segment of the industry is “decidedly negative” for 2014.

In 2008, the entire U.S. economy was “sent into a tailspin,” due in large part to the collapse of the country’s financial institutions, S&P said.

“Hospitals and health systems were affected immediately in the aftermath as investment returns and operating margins went south for many,” S&P said in the press release. “The sector has rebounded, with hospitals boosting their cash flow and gaining manageable profits again, but S&P sees a plethora of pressures that will hurt providers’ bottom lines.”

S&P said downgrades accelerated in 2013, and upgrades are now few and far between. Additionally, most of S&P’s upgrades were due to lower-rated credits merging or affiliating with larger, higher-rated credits, a trend that will likely persist, the company said in the release.

S&P also noted more providers posted operating losses due to weak volumes and major investments in physician recruitment and health IT. Balance sheet metrics were still sound, overall, for hospitals and health systems this year and in 2012, but S&P said it is predicting that downgrades will continue to exceed upgrades “because cutting costs to meet revenue pressures is getting more difficult.”

Other trends working against hospitals and health systems in 2014 S&P noted include:

• a transition to value-based reimbursement;

• more risk-based contracting;

• health insurance exchanges;

• the two-midnight rule;

• cuts to Medicare; and

• volatility associated with Medicaid, especially for providers in states where the program will not be expanded.

“Although we believe that many hospitals and health systems will manage effectively during this period of change and reform, even the strongest hospitals are, at best, only likely to hold existing margin and liquidity levels,” S&P analysts said in the summary report. “Weaker providers will likely see ongoing margin compression and eventually balance sheet pressure leading to rating deterioration. Overall we expect operating performance to decline, with some acceleration in the number of downgrades versus upgrades in the year ahead.”

For-profit hospital systems are not immune to these pressures either, S&P said. It said margins for big chain healthcare systems have taken hits over the past couple years due to poor volumes, and those companies will have to work hard to ensure their financials do not continue to trend downward.

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