Moody’s Investors Service this week downgraded ProMedica’s debt to speculative or junk status, joining the other two major bond-rating agencies in finding ProMedica’s creditworthiness below investment grade.
It’s another indication that Toledo-based ProMedica, the area’s biggest health system, faces a long road to recovery.
Moody’s kept ProMedica’s rating under review for a possible further downgrade.
Analysts say a financial turnaround of ProMedica is at least a year away and could result in the divestiture of additional skilled nursing facilities.
Operating losses soared to $281.1 million during the first six months of 2022, led by a $229.3 million operating loss in the senior care division.
ProMedica’s once-vibrant Paramount insurance unit is trying to find its footing. It suffered a giant setback over the past year with the loss of its Ohio Medicaid contract worth $1.57 billion in annual premium revenue.
And even the hospital division — locally dominant and usually dependable — is now losing money.
“The trend line says they’re going to lose money operationally through 2023,” said Kevin Holloran, a senior healthcare analyst with Fitch Ratings who has been involved with grading the creditworthiness of ProMedica for years.
A ProMedica spokesman said CEO Randy Oostra and the system’s new interim CFO Louis Robichaux IV were not available to be interviewed for this story.
In a statement, ProMedica said intense efforts to improve operating performance have started to pay off with “financial indicators and patient volumes” improving over the past several months, “particularly in the last month.”
Like hospital systems across the country, ProMedica was hit hard by the coronavirus pandemic that taxed clinicians and staff and caused non-coronavirus patients to stay away from hospitals for months.
“ProMedica has not been immune to the impact of the pandemic, as we have been working diligently to manage through staffing shortages, inflation and rising expenses,” the statement noted.
Cleveland Clinic, for example, posted an operating loss of $183.5 million in the second quarter, driven by higher staffing costs.
Not-for-profit ProMedica is comprised of three main parts. Its 11 hospitals operate in northwest Ohio and southeastern Michigan with a strong presence in metro Toledo. The Paramount health plan operates largely in Ohio, Michigan, and four other Midwestern states.
And its senior care division, formerly HCR ManorCare, operates in 26 states with 158 skilled nursing and rehabilitation facilities, 50 memory care locations, and hospice care in 117 metro markets.
Last year, each of the three legs contributed about equally to overall ProMedica revenue, which reached $6.93 billion.
But with the loss of the $1.57 billion Ohio Medicaid contract, and a net divestiture in 2021 of skilled nursing facilities, ProMedica is destined to finish 2022 as a smaller entity, Mr. Holloran said.
That’s a stark reversal from the optimism that permeated the organization four years ago after the blockbuster $3.3 billion acquisition of Toledo-based HCR ManorCare. At the time, HCR ManorCare was the largest for-profit nursing home chain in America. It has since been fully absorbed by ProMedica and operates as a not-for-profit division.
The acquisition, which Mr. Holloran called ‘audacious,’ vaulted ProMedica from a strong regional healthcare player to the 15th largest not-for-profit hospital system in the nation.
But before ProMedica could truly realize the benefits of the integration of the senior care business, including cross-referrals from hospitals to skilled nursing facilities, the coronavirus pandemic hit.
In addition to people generally avoiding hospitals, a near nationwide shutdown of elective surgeries robbed ProMedica’s senior facilities of the hip and knee replacement patients, and other short-term rehabilitation business, that those facilities specialize in treating.
The pandemic also caused thousands of clinicians and staff to leave the industry, creating shortages for all hospitals and homes that have caused labor costs to balloon.
With wages, salaries, and benefits typically comprising 55 percent of institutional healthcare costs, that’s put tremendous financial pressures on systems, Mr. Holloran said.
Like other healthcare organizations, ProMedica has had to pay a premium to agencies for contract nurses and workers to keep its hospitals and skilled nursing facilities adequately staffed.
Mr. Holloran said that industry-wide, agency nursing rates per hour have moderated from well over $200, sometimes as high as $300. But still, a hospital or skilled nursing facility has to pay somewhere in the neighborhood of 2.5 times per hour what an employee would earn in wages and benefits, he said.
In its statement, ProMedica said it is making headway in reducing spending on agency staffing while working to maintain high-quality care and patient access.
“Since the beginning of the year, we have reduced our agency staffing expenses by approximately 40 percent in acute care and 50 percent in senior care,” the statement said.
Improving operations has to be ProMedica’s top priority, said Anne Cosgrove, an analyst with New York-based S&P Global Ratings who rates the debt of ProMedica.
She said the system’s biggest hurdles are “how to stem operating losses and the cash burn rate.”
Earlier this year, ProMedica said it was cutting 150 jobs. But that’s a drop in the bucket of the nearly 44,000 people it employs.
Mr. Holloran declined to speculate whether more job cuts were coming, saying ProMedica has not mentioned them thus far.
He said cutting healthcare staff, especially clinicians, is a delicate balancing act because they are so difficult and expensive to replace.
In May, ProMedica went outside the organization to find a healthcare turnaround professional to become its interim CFO to replace Steve Cavanaugh.
Mr. Robichaux is a former Deloitte restructuring principal who was brought aboard to help ProMedica “navigate back to a strong balance sheet and manage through ongoing financial challenges,” The Blade reported in May.
He is a Dallas-based senior managing director at management consulting firm Ankura. He has guided turnarounds and healthcare restructurings that have won national awards for work at Tuomey Healthcare System in Sumter, S.C. and at St. Francis Hospital, according to his Ankura biography.
In this week’s downgrade report, Moody’s noted that ProMedica numbered among its positive financial positions its available cash of $1.4 billion, as of June 30.
But even that has been reduced recently. In the wake of the earlier ratings downgrades by Fitch and S&P Global, ProMedica recently had to contribute about $108.8 million in cash as collateral on bank agreements as the downgrades caused covenant violations on loans and letters of credit.
One thing ProMedica has going for it is the ability to raise cash by selling assets if it chooses to, Mr. Holloran said.
For example, ProMedica operates its skilled nursing facilities in a joint venture with Toledo-based Welltower, a real estate investment trust.
The joint venture owns the buildings and ProMedica operates the facilities through leases with the joint venture. To raise cash, ProMedica in January sold 5 percent of the 20 percent stake it held in the joint venture to Welltower for $137.4 million.
ProMedica also got a piece of the proceeds when it worked with Welltower last year to sell 19 underperforming skilled nursing facilities.
There still may be additional skilled nursing facilities to sell that are either underperforming operationally or are in market clusters too small to manage efficiently, Mr. Holloran said.
That said, ProMedica also has reported acquiring with Welltower two assisted living facilities and nine skilled nursing facilities in 2021, meaning that it is unlikely that ProMedica would want to sell out of the senior care business wholesale, he said.
ProMedica said it routinely reviews its operating portfolio and “seeks opportunities to add attractive assets and remove underperforming assets.”
So that leaves controlling costs and fixing operations as ProMedica’s best path to a turnaround.
That’s where ProMedica is focused.
“Like many other major health systems across the country, ProMedica has implemented a plan to develop and execute intense initiatives within our divisions to find performance efficiencies,” ProMedica said in its statement.
First Published September 17, 2022, 11:00 a.m.
