DALLAS – Ohio-based ProMedica Health System's shaky fiscal 2016 results drove a one-notch downgrade by Moody's Investors Service to A1 from A3.
The outlook is stable after Tuesday's downgrade, which affected $775 million of debt. The system's debt is comprised of mostly fixed-rate bonds and bank loans.
Moody's attributed the action to a large operating loss and an unexpected liquidity decline in fiscal 2016, material operating and capital costs to execute multiple strategies, and expected further liquidity declines and lower margins than historical and previously projected levels as the system works to transform is business model.
"The downgrade reflects execution risks related to transforming the business model to an academic enterprise and one that is more dependent on the health insurance business, which accounts for 43% of revenue and has variable performance," said Moody's.
"Similar to other health systems, ProMedica is balancing increasing costs with dwindling revenue and reimbursements," the system said in a statement. "The decline in operating performance is also attributed to several major one-time expenses in 2016 including a significant investment in an electronic medical record platform, the divestiture of one hospital, early retirement expenses and reorganizational costs."
The health system had weak performance in fiscal 2016, which included over $50 million of severance and restructuring costs, a $147 million operating loss, and breakeven operating cashflow. The system is in a heavy period of capital spending which includes the construction of a $350 million tower at Toledo Hospital.
Moody's added that these large costs are not expected to recur.
"As an A1-rated health system, ProMedica remains in the top quartile of all rated organizations with a strong balance sheet that puts us in an excellent position to meet our financial commitments," the system said in its statement. "We are confident in our future outlook, ability to strengthen our financial standing and maintain a leading market position in our region."
The system has $3 billion in total revenue, supported by a sizable health insurance company and aligned physicians.
ProMedica also benefits from its leading market position in the Toledo area and northwest Ohio region as well as southern Michigan.
The system operates 12 hospitals in Ohio and Michigan and a large health insurance company – Paramount -- with approximately 334,000 members in Medicaid, Medicare, and commercial plans.
Moody's said that Paramount has more than doubled its revenue between fiscal years 2012 and 2015 to $1.3 billion.
Debt is secured on a gross revenue pledge of the ProMedica Healthcare obligated group. The obligated group consists of The Toledo Hospital, Flower Hospital, ProMedica Continuing Care Services Corp., Bay Park Community Hospital, Defiance Hospital Inc., Fostoria Hospital Association, Memorial Hospital, Emma L. Bixby Medical Center, Herrick Memorial Hospital Inc., and Lenawee Long Term Care.
