Losses tied to its insurance subsidiary drove a two-notch downgrade of Ohio-based ProMedica Health System by Moody’s Investors Service, leaving the system at the lowest investment grade rating of Baa3.
Moody’s assigned a negative outlook at the lower rating. S&P Global Ratings and Fitch Ratings rate the health system BBB and BBB-plus, respectively.
The downgrade impacts $1.6 billion of outstanding debt. The system has $347 million of Series 2017 bonds held by various banks that are subject to mandatory purchase in November 2021. If the rating from any rating agency for ProMedica falls below Baa3 or BBB-minus, there is an event of default and the bonds can be accelerated.
Moody's cited ProMedica's very weak year-to-date fiscal 2019 performance and lower-than-anticipated, material shortfalls in cashflow and liquidity over the next three years as triggering the rating action.
“The system's dependency on state payments for provider and insurance operations will be a fundamental risk, as seen with recent insurance losses,” Moody’s stated.
ProMedica logged an operating loss of $27.9 million for the year ending June 30, 2019 — $15.4 million higher than the hit ProMedica took over the same period in 2018. The losses largely stem from losses suffered by the nonprofit's insurance arm, Paramount.
The insurance arm serves over 336,000 members and growth has been substantially in Medicaid membership accounting for about 40% of total membership following Medicaid expansion which came into play after the passage of the Affordable Care Act. Paramount is one of five Medicaid insurers in Ohio to provide statewide managed care services.
This growth in Medicaid managed care has made the insurance operation more dependent on state funding and subject to variability, said Moody's.
“The downgrade is primarily the result of challenges our Paramount business has had with Ohio Medicaid over the past year and the resulting impact on our finances,” Tausha Moore, a spokesperson for ProMedica, said. “We are continuing to work collaboratively with the Ohio Department of Medicaid, and we are confident we will find an acceptable resolution that will allow us to serve this population in a financially viable manner.
“In the meantime, ProMedica continues to have a strong balance sheet, with approximately $1.5 billion in cash to support its financial stability. We are confident about our future and our ability to strengthen ProMedica’s financial standing.”
The primary focus for the system's insurance operation over the next six months will be to reduce the sizable losses, Moody’s said. Moody’s said the system had already secured a $24 million increase in rates from the state that is included in the year-to-date performance and the system is actively engaging in multiple strategies and discussions with the state to significantly reduce losses.
ProMedica is expected to see lower-than-expected margins as a result of challenges in the nursing home business. The year-to-date June 2019 operating cashflow margin for the post-acute business was 3.5% and is expected to average 4% over the next several years, according to Moody's.
“ProMedica's post-acute business will be disproportionately affected by trends and financial performance of the skilled nursing facilities given that business makes up two-thirds of post-acute revenue,” Moody’s said. “The organization will increase investments in the skilled nursing facilities and assisted living business to grow revenue and compete with new entrants.”
In July 2018, ProMedica acquired the operations of HCR ManorCare and entered into a lease with the joint venture for the real estate property. The joint venture is owned 80% by Welltower and 20% by ProMedica.
The system was downgraded by S&P and Moody’s in the immediate wake of the deal over the amount of leverage the system had to take on to close the transaction. ProMedica used $524 million of cash and a $1.15 billion bridge loan with Barclays to finance the transaction. The bridge loan was refinanced into long-term debt last October.
ProMedica operates 12 owned acute care hospitals in two states, the health insurance company including a dental plan, and provides post-acute services in 27 states.
With the acquisition of HCR ManorCare in 2018, the organization operates in more than 410 post-acute locations, including assisted living facilities, skilled nursing and rehabilitation centers, memory care communities, outpatient rehabilitation clinics, and hospice and home health care agencies.
