standsrd'spoor_immaginiAs we teased this morning in the Monday Business Briefing, the Denver-based hospital system that was going to bail out University of Louisville Hospital is having some problems of its own.

Since hooking up with the University of Louisville in a joint operating agreement late last year, Catholic Health Initiatives has gone from a solid profit to a big loss in one year, according to a Standard & Poor’s report dated October 9.

Bottom line:

CHI’s FY 2012/2013 operating income declined by over $400 million to a $274 million loss as of June 30, from a $155 million profit.

Kentucky was the biggest drain on CHI, but it wasn’t the only issue.

That flip from black to red includes $97 million of nonrecurring operating income in fiscal 2012 that distorted the financials, according to the S & P report.

The report outlines S&P’s rationale for its CHI bond rating downgrade. It also shines a light into corners of CHI’s finances that even the annual reports of publicly traded companies miss.

CHI debt still gets a stellar, investment AA- grade rating along with a stable outlook. But there are problems ….

S & P analysts had a long list of reasons why they were cutting CHI’s debt rating that come down to (shades of the United States of America) too much debt.

Debt, debt and more debt:

• Increased debt due to investments in IT and in keeping up with changes in health care due to the Affordable Care Act.

• Increased debt due to billions invested in mergers and acquisitions including acquiring St. Luke’s Episcopal Health System in Houston.

S & P also notes that some of acquisitions a) ain’t doin’ so hot, and b) need a lot more investment to get better.

So, more debt is on the horizon.

Of course, as we reported this morning, Kentucky operations are the big drag on the Denver-based, non-profit system, which is affiliated with the Roman Catholic Church.

From the report:

Of CHI’s 12 key regions, six had generated an operating loss in fiscal 2013. Of these, the largest loss was at KentuckyOne, which was created in early calendar 2012. We understand that the loss was attributable to a significant number of newly employed physicians, poor performance among the employed medical group, including its volumes and revenue cycle, inability to take advantage of consolidation opportunities until University Medical Center joined in the fourth quarter of fiscal 2013, and the temporary negative effect of the implementation of a new clinical and billing information system, including reduced volumes and additional staffing costs. Management has identified $50 million of improvement opportunities, including clinical consolidation, physician billing and productivity improvements, and others, to be achieved in fiscal 2014.

Management’s way of saying things looked darkest before the dawn of consolidations, new systems and greater efficiencies.

However, at the minimum, U of L is not going to be getting all the money from CHI they thought they were, as quickly as they thought they were, according to insiders.

Let’s go back a year ago and look at what the operating agreement – vehemently opposed by women’s reproductive rights and civil rights groups – was going to bring to University of Louisville Hospital:

Highlights of the joint operating agreement include CHI, through its wholly owned KentuckyOne system in Kentucky, injecting $543.5 million of investment into the university medical operations during the first five years of the JOA, expanding to $1.4 billion over 20 years, including:

  • $75 million annually for academic and program investments and another $95 million over the first three years for “key service lines and departments”;
  •  $70 million for IT infrastructure upgrades at UMC;
  • $15 million for discretionary spending by U of L for each of the first three years, targeted on statewide health efforts;
  • and $3 million dedicated for research annually and $7.5 million per year in capital investment for technology.

Did any of that happen? Who knows? We’ve tried to talk to CHI spokespeople over and over again with no success.

All we – and you – can do is rely on good ol’ Standard & Poor’s to give us the empirical data, or a least what they can glean from CHI financials.

All through the 16-page report are little nuggets such as this:

We anticipate that further acquisitions will be accretive to CHI’s business position. However, given the weak operating performance and low debt service coverage, we believe that CHI has limited flexibility for financially dilutive acquisitions at the ‘A+’ level, even if they improve the business position.

Translated: CHI better get its systems in 17 states firing on all cylinders, or think about being a little less aggressive in the M&A sector.

The back story:

The creation of Kentucky One last year created the largest system in Kentucky. CHI owns 83-percent of KentuckyOne Health along with Jewish Hospital & St. Mary’s HealthCare. KentuckyOne has about $2 billion of net patient revenue annually and is the largest health care system in Kentucky, with a presence in both Lexington and Louisville, and a bunch of hospitals in between in towns such as Bardstown that would otherwise not have level-one care.

The back story on CHI from the S&P report:

CHI’s operations cover a large footprint, with 87 hospitals; 40 long-term care, assisted living, and residential facilities; more than 3,000 employed physicians; and other operations in 17 states. CHI operates 12 regional markets, some covering more than one state, and operates in five markets as joint ventures. Many of CHI’s facilities are sole
community providers, and 23 of the hospitals are critical-access facilities. The CHI credit group’s patient base is quite large in our view, with 441,509 acute-care admissions in fiscal 2013 for continuing operations. The St. Luke’s Health
System, which joined CHI in the last month of fiscal 2013, has approximately 50,000 admissions annually.