A major credit rating agency is considering downgrading Eastern Maine Healthcare Systems, concerned about the ability of the state’s largest hospital system to pay back its loans.
Moody’s Investor Service has consistently lowered the system’s rating since 2013. Another downgrade would sink EMHS into the “non-investment grade” category, better known as “junk bond” status.
That blow to the system’s creditworthiness could seriously hamper it in issuing bonds, which it relies on to refinance old debt and to fund major construction projects, such as a seven-story tower at its flagship Eastern Maine Medical Center in Bangor. Investors may be less willing to loan EMHS money through those bonds or demand higher interest rates.
That would pose yet another challenge during an already stressful time for hospitals, which are struggling with declining reimbursements from government health insurance programs and uncertainty about the future of federal health reform, among other factors.
“It’s not good for any hospital at any time, but it’s particularly not good at a time when hospitals are facing significant financial stress and uncertainty,” Andrew Coburn, a rural health expert at the Muskie School of Public Service at the University of Southern Maine, said.
Moody’s consideration of a downgrade from Baa3 to Ba1, which would affect $393 million of the system’s outstanding debt, was triggered by EMHS falling short of its expected financial performance during the 2016 fiscal year, according to the credit rating agency.
It cited as challenges the “very weak and tenuous state of operating margins” as EMHS works to complete the tower project in Bangor, sustain a turnaround at its struggling Mercy Hospital in Portland and plan for major IT improvements. It also cited the system’s continued efforts to consolidate its network of nine hospitals and other health organizations, the state’s largest health network by geography.
EMHS’ operating margin in 2016 was negative 2.25 percent, meaning the system lost more revenue than it collected for treating patients.
It suffered a $34 million loss that year, more than five times a roughly $6 million loss in operations during 2015, according to its annual report.
Mercy, which the system acquired in 2013 as its first foray into southern Maine, accounts for a large portion of last year’s losses. Its operations were in the red to the tune of roughly $17 million, according to a presentation EMHS made to investors in December. The Aroostook Medical Center in Presque Isle, another EMHS hospital, also posted significant losses.
A credit downgrade likely wouldn’t affect the tower project in Bangor, which is already financed, but it could swell the system’s costs for a planned expansion at Mercy. The Portland hospital has two campuses — an aging facility on State Street and a newer complex on the Fore River — that are expensive to operate concurrently. It has long sought to consolidate operations at the Fore River site as part of a project estimated to cost up to $100 million.
EMHS is working to stabilize Mercy’s finances and shore up the broader system’s performance as it considers the best path forward for the Mercy project, according to Tony Filer, EMHS chief financial officer.
Filer has been in the position for only four months, while Chief Operating Officer Tim Dentry joined EMHS just three months ago. Moody’s appears willing to give both time to settle in at the organization before issuing a decision, Filer said.
“It’s brought focus to us to try and make sure that we can tell a story that keeps us from being downgraded,” he said. “We believe we can, and the fact that they didn’t take that action immediately suggests to us that we have an opportunity to do that.”
Moody’s acknowledged it has held off on the downgrade because of the system’s liquidity and efforts to limit new investment and capital projects. The rating agency expects to issue its decision by mid-May.
Another rating agency, Standard and Poor’s, assigned EMHS a BBB rating, its lowest investment grade, last July.
“I want to make sure that whatever we do is for the good of the community and improves their health and their access and we’re good stewards of the resources we have to bear,” Dentry said. “We have a huge opportunity here that indeed impacts the entire state. And it’s a challenge.”
EMHS, similar to many health organizations throughout the country, has heavily invested in new ways of providing care, spurred by reforms under the Affordable Care Act that reward hospitals financially for keeping patients healthy at less cost, rather than steering them toward more visits and procedures. For example, the system significantly lowered readmission rates, which reflect how many patients wind up back in the hospital a month after being discharged, Dentry said.
That means those patients are healthier, but its hospitals are getting paid for fewer admissions.
Many hospital systems are in a similar position, Coburn said.
“It’s taking longer to get to a place where they can show profitability or savings on a lot of these initiatives,” he said. “That’s because there are a lot of initial investments that have to be made and that costs money.”
Following the Mercy acquisition, EMHS added Maine Coast Memorial Hospital in Ellsworth to its fold in 2015, in part because of the hospital’s worsening financial outlook.
The system took on the burden of debt that Mercy and Maine Coast carried, but it didn’t have to spend much cash to acquire them, Filer said. For that reason, he’s comfortable with some early losses because expanding the system creates more opportunities to realize savings, he said, such as by purchasing bulk supplies at cheaper rates.
The larger the system grows, the better it can find efficiencies and improve care, as well as withstand the many pressures facing the health care industry, he said.
“We’re getting stronger and better almost in spite of the fact that the revenue flow is such a challenge,” he said.
This story appears through a media partnership with Bangor Daily News.