Moody’s Investors Service downgraded Community Health Systems (CHS) on its corporate family rating (from B2 to B3), probability of default rating (from B2-PD to B3-PD) and senior unsecured notes (from Caa1 to Caa2).
Moody’s also affirmed CHS’ speculative grade liquidity rating of SGL-3 and overall gave a “stable” outlook for the large for-profit healthcare system.
Moody’s said it expects CHS will have “adequate liquidity over the next 12-18 months” and modestly positive free cash flow “before divestiture proceeds, over $800 million of availability under its revolving credit facility and adequate cushion under financial covenants. Community has no significant debt maturities until late 2019.”
Beyond its own financial issues, CHS, which has 137 hospitals spread across 21 states, faces industry challenges that Moody's said will limit CHS’ efforts to improve financially.
“Payers and physicians are increasingly routing patients to lower-cost care settings, including outpatient centers and in-home care. Further, the increasing prevalence of high co-pay and high-deductible health plans will also drive patients to seek lower cost care. The Centers for Medicare and Medicaid Services continues to approve more procedures to be performed on an outpatient basis. For Community, we believe these headwinds will offset fundamental growth in healthcare demand from aging baby-boomers. Lower enrollment on the Affordable Care Act's health insurance exchanges and lower birth rates will also exacerbate inpatient volume weakness,” said Moody’s.
Much like other hospitals, CHS is dealing with a greater payer emphasis on patients getting care as outpatients or in clinics rather than as inpatients. CHS is integrating accountable care organizations and managed care arrangements and building ambulatory surgery centers and outpatient services in some markets in hopes of capturing outpatient business.
Moody’s said CHS is already ahead of other large hospital companies like Tenet Healthcare and HCA Healthcare in terms of generating nearly 60% of its revenue from outpatient, but the greater move to outpatient will hurt inpatient volumes, which receives a “significantly higher rate and tend to have better margins,” said Moody’s.
Lower patient volumes will continue to pressure CHS’ margins. “This will offset some of the benefits of divesting some of Community's less profitable facilities,” said Moody’s.
CHS lost $1.7 billion last year and accumulated about $15 billion in debt. In hopes of stopping the financial bleeding, CHS plans to sell at least 30 hospitals this year to bring in billions of net revenue.
However, Moody’s said CHS will likely have to use savings through divestitures to invest in “new technologies, physicians and facilities in order to drive sustainable volume growth. As a result, material margin improvement absent volume growth will be difficult.”
The downgrades are not good news for CHS, which has continued through tough times this year as they hope to shed hospitals and debt and get onto better financial footing. Investor ASL Strategic Value Fund recently sent a letter to CHS’ board of directors suggesting the board replace CEO Wayne Smith because of "previous missteps have resulted in billions of dollars of shareholder losses."
The company also announced a $137 million loss in Q2, which was better than the $1.4 billion loss during the same period last year. Net operating revenue fell from $4.6 billion last year to $4.14 billion in the second quarter for this year. Smith blamed lower than expected patient volumes and increased medical specialist fees, purchases services and information systems expense.