DALLAS—Ohio-based Mercy Health's ailing collections process and the winding down of its affiliated insurance company – both of which have cut into operating profits -- drove Fitch Ratings to revise the system's outlook to negative from stable.
Fitch affirmed the state's largest not-for-profit healthcare provider at AA-minus. The action follows recent downgrades by Moody's Investors Service and S&P Global Services.
Fitch said that the negative outlook reflects "Mercy Health's compressed operating profitability in fiscal 2015 and the expectation that profitability will remain at compressed levels through the end of fiscal 2017 before rebounding in fiscal 2018."
The action impacts $1.6 billion of bonds. The rating agency affirmed the F1-plus short-term rating on the system's 2012 bonds.
On June 10, Moody's downgraded Mercy to A2 from A1. The system's short-term debt rating was lowered to A2/VMIG-1 from A1/VMIG-1, retaining the short-term portion of the rating. A further downgrade would strip the system of the top VMIG-1 short-term rating, Moody's said.
S&P downgraded the hospital's long term rating on May 17 to A-plus from AA-minus.
All three bond rating agencies attribute the downgrades to significant financial losses generated by HealthSpan Partners' insurance and physician care delivery operations, which were purchased by Mercy Health in 2013 and operated previously as Kaiser Foundation Health Plan of Ohio and Ohio Permanente Medical Group.
Mercy Health discontinued the Health Span operation in fiscal 2015. Medical Mutual of Ohio acquired it in March. However the insurer's claims will be paid by Mercy throughout fiscal 2016 and early fiscal 2017.
Mercy is also liable for the risk adjustment payments HealthSpan is required to make under federal healthcare reform in fiscal 2016. Accounting for HealthSpan as a discontinued operation, Mercy Health reported a 9.3% operating cash flow margin in fiscal 2015, compared with over 11% in fiscal 2014 excluding HealthSpan.
Mercy Health also faces an additional cash squeeze from collection issues related to the transition of its information technology platforms. Fitch said collection issues negatively impacted fiscal 2015 profitability by about $51 million and are projected to hurt consolidated operating profitability in fiscal 2016. In May, Mercy Health acquired Ensemble Health Partners, a revenue cycle improvement firm, to address the system's collection's challenges.
