Credit-rating giant Moody’s downgraded Memorial Health System’s outlook from stable to negative last week, and even though the hospital has retained its A3 bond rating, it could still spell trouble down the road.
A negative outlook could affect Memorial if it were seeking to borrow money, said Allan Roth, a local investment specialist and contributor to CBS’ Moneywatch.com.
However, because the system is in the midst of an ownership transition, the downgrade could be temporary, said Roth, who is also a former Memorial hospital board member.
The University of Colorado Hospital, which is in negotiations to lease Memorial, will have to refinance its debt. Moody’s gave UHC a AA3 rating and a positive outlook.
But that certainly doesn’t mean the lower outlook is a good thing, Roth said.
“It basically spells more trouble for investors than it does for Memorial itself,” he said. “It’s something they’ll take a look at.”
But UHC officials say they are committed to leasing Memorial.
“Our commitment to Memorial Health System remains strong,” said spokesman Dan Weaver in a statement about the Moody’s report. “We remain confident that our partnership and lease of Memorial will bring a commitment for high-quality care for patients, including those who depend on Medicare, Medicaid and TriCare as well as all the citizens of El Paso County.”
Despite the downgrade, Memorial does have some strengths — its cash balances are extremely healthy. At year’s end, it had 182 days of cash on hand. As of February, that had increased to 192 days. That health was a major factor in affirming the A3 credit rating, Moody’s says.
Moody’s said the problem was partly due to poor financial performance of the past year. The hospital lost $6 million in 2011, compared with a net profit of $11 million in 2010. But it isn’t merely the management’s fault, according to Moody’s report.
Instead, Moody’s blames it on the uncertainty surrounding the ownership of the hospital, something CEO Larry McEvoy has been warning City Council about for months.
“Poor transition of governance contributing to financial difficulty,” the report said. “The city is looking to cede direct governance of the hospital, and the hospital’s uncertain future has contributed to organizational confusion and poor operating results; certain city council members are in open conflict with hospital management …failure to receive voter approval in August would likely increase short-term organizational instability.”
The report also criticized the way City Council has gone about addressing the hospital’s ownership. It started looking at options in 2009, with the Memorial Citizens’ Commission. That commission ended in November of 2010, with a recommendation to spin it into a nonprofit. By the end of the year, the City Council had formed another task force and decided to issue requests for proposals to lease the hospital system. Those requests and presentations took up much of the spring of last year, with the decision to allow UCH to lease the hospital at the end of 2011. It all adds up to uncertainty, Moody’s said.
“The city has been actively in the process of deciding what to do with its hospital for the last several years,” the report said. “We believe this extended period of uncertainty has lead to the disruption of longstanding physician referral patterns and was a significant driver of the poor operational performance achieved in 2011. Furthermore, there have been cases of public acrimony between city council and the hospital, which we believe further undermines community confidence.”
And if the city doesn’t act quickly — and voters fail to approve — to install the new lease agreement with UCH, Moody’s warns that the hospital’s credit rating could be downgraded.
Tim Leigh is one of the City Council members in “open conflict” with Memorial’s administration. Leigh has publicly requested the hospital’s senior leadership — CEO Larry McEvoy and COO Carm Moceri — to step down.
“So does that mean it’s wrong to openly criticize a city-owned enterprise?” Leigh asked. “I have been critical of Memorial’s administration and I will continue to be critical of Memorial’s administration. I’ll be so pleased when this ownership deal is done.”
Leigh said ratings like Moody’s aren’t taken seriously — and that they should only take into account “quantifiable data.”
“How do you measure the impact of criticism?” he asked. “It’s not quantifiable. It’s just one guy sitting at a desk’s opinion. I went to New York City with the utilities (Colorado Springs Utilities) when they were discussing their bond ratings. These ratings depend on one person — and what if he, or she, didn’t get any sugar that morning? What if no one said, ‘I love you,’ when they left the house? It puts them in a bad mood, and that could affect how they rate. That wouldn’t happen if they did a deep dive, if they stuck to data only.”
However, the Moody’s report cites specific numbers.
It says the hospital’s operating cash flow dropped from $58.8 million in 2010 to $40.6 million in 2011. It also said the hospital had “weak debt measures for the A3 category,” with debt-to-cashflow of 7.9 times.
It also claims that Memorial has more than likely lost market share to Penrose-St. Francis Health Services. Memorial traditionally had 57 percent of the local market, but Moody’s believes Penrose has chipped away at that lead during the discussions about the hospital’s ownership.
Roth agrees with Leigh’s assessment — but only to a point.
“It’s true that the ratings agencies aren’t as credible as they once were,” he said. “They gave AAA ratings to subprime garbage. Last August, when Standards & Poor’s downgraded U.S. debt, treasuries soared. It didn’t make a difference.”
But that doesn’t mean the ratings aren’t important, he said. It will make a difference if the ownership situation isn’t sorted out.
But all the “ifs” depend on voter reaction to a lease that’s currently being negotiated privately. The talks are on track, Leigh says, and the city hopes to make the lease details public in time for an August election.
“The talks are going very well,” he said. “I’m told that everything is going smoothly and that we’ll meet the timeline or come very close to it.”
And what about the negative rating from Moody’s?
“This deal is being negotiated by very smart, very sophisticated people,” Leigh said. “And I don’t mean the Boards of Trustees of each organization. Both sides have attorneys, hired guns, to do the negotiating, and they’re too sophisticated to pay much attention to that report.”