UPDATE: May 11, 2021: On Monday, Fitch Ratings also downgraded Sutter Health to A from A+. Fitch, however, revised the rating outlook to stable from negative.
The ratings agency said that despite increasing labor and legal costs for the system, the outlook reflects that its "broad delivery of care network will remain in strong demand in its markets and that cash flow will ultimately be adequate to sustain Sutter Health's capital and strategic investments."
- Standard & Poor's ratings division has downgraded Sutter Health's bonds to A from A+. S&P cited a "weakened performance" related to the COVID-19 pandemic. The agency believes it will take "a couple of years to fully address with a sizeable and multi-year turnaround." However, its ratings outlook remains stable.
- Sutter's net patient revenue was down by nearly $900 million in 2020 versus 2019. Its operating losses nearly quintupled last year compared to 2019, according to S&P. Overall, the hospital system slipped into the red last year, compared to a modest surplus in 2019.
- Sutter was boosted last year by assistance from the federal government, receiving $1.8 billion in funds from the Coronavirus Aid, Relief, and Economic Security Act and advanced Medicare payments, and its unrestricted reserves grew 10% year over year. However, S&P said Sutter's financial performance will "remain light over the next couple of years."
Like most hospital systems, the past year has been tough on Sacramento-based Sutter. The COVID-19 pandemic has taken a toll on the volume of elective procedures, driving down revenue significantly. The system also recently agreed to pay out $575 million to settle antitrust litigation filed by the California attorney general.
Those two factors conspired to drive Sutter's operations further into the red. It reported an operating loss of $402.6 million last year, versus an operating loss of $87 million for 2019. Sutter reported net income of $298.6 million from its investments — up from $285 million in 2019. However, it still reported an overall loss of $104 million, compared to net income of $198 million in 2019. Without the infusion of cash from CARES, Sutter would have lost $1 billion last year, according to S&P.
Nevertheless, Sutter is in decent shape for the long-term. It has $6.6 billion in cash on hand, compared to $6 billion at the end of 2019, and cut $180 million in labor costs that will mostly take effect in fiscal 2021. It also recently launched a "sweeping review" of its finances in response to the effects of the COVID-19 pandemic.
However, S&P remains skeptical that it will see a turbocharged performance from Sutter anytime soon. It noted that Sutter was already dealing with thin operating margins before the pandemic, and issues such as the high cost of living in Northern California (which inflates labor costs) and the potential for ongoing wildfires (which can depress elective procedure volumes).
"While we recognize that the team is focused on rightsizing operations to generate enough cash flow to make appropriate investments, we also believe that implementation of certain initiatives could take longer given the significant turnaround required and the risks already mentioned," S&P said. "We see some flexibility for operating softness given the healthy balance sheet and the team's turnaround efforts, but do expect to see progress."