Tue 10/11/2022 11:15 AM
Share this article:
Relevant Documents:
Washington State Hospital Association (Press Release)
Valley Medical Center (FY 2022)
Providence St. Joseph Health (Q2 2022)
Confluence Health System (Q2 2022)

The hospital and health system in Washington reportedly lost $1.7 billion throughout the first half of 2022 with a $1.2 billion operations shortfall, according to a recent survey by the Washington State Hospital Association, or WSHA.

During a presentation on the survey, Cassie Sauer, president and chief executive officer of the WSHA, said the results were “clear and incredibly concerning,” explaining that the association sees that hospitals in Washington state “continue to face an unsustainable financial situation.” Sauer added that the financial losses “continue to be enormous” and that revenue is “not keeping up with rapidly escalating costs.” WSHA cited rising inflation, labor shortages, high personnel costs, complex patient needs, low Medicaid reimbursement rates and depletion of federal funds among factors driving this downward trend, which is expected to carry into the last six months of the year.

These challenges are widespread across hospitals and healthcare systems in the state, among which are the recent credit downgrades for MultiCare Health System and Providence Health, in addition to negative margins and high debt to capitalization ratio of Valley Medical Center in the fiscal year 2022. The largest system, Providence Health, suffered a drop of debt service coverage to 0.5x as of June 30, down from 2.7x year over year.

MultiCare Health System

Just last week, Fitch downgraded MultiCare Health System’s issuer default rating from A+ to AA-, while Moody’s downgraded the system to A1 from Aa3 in late August, as reported.

In addition to having $2 billion in outstanding debt, MultiCare had 200 days’ cash on hand, or DCOH, in the second quarter ended June 30, down from 293 DCOH on Dec. 31, 2021. In the first six months of 2022, MultiCare reported an operating loss of $194.9 million and a non-operating loss of $251.9 million.

Despite growth in patient demand in the second half of this year, MultiCare is facing pronounced pressure to retain its labor force due to high turnover rate and increased salary and benefits for current employees, which is up 25% year over year, according to a ratings commentary by Fitch.

Valley Medical Center

Public Hospital District No. 1 of King County, Washington, dba Valley Medical Center, or VMC, reported a $69.2 million operating loss for its fiscal year ended June 30, 2022, an increase in the operating loss of $21 million in fiscal 2021 and operating loss of $39 million in fiscal 2020, according to its audited financial statements for fiscal 2022.

A combination of property tax revenue and state and local funding buoyed the system in fiscal 2021 and 2020, but state and local revenue declined to just $11.5 million in fiscal 2022, down 41% from $19.8 million in fiscal 2021 and down 61% from $30 million in fiscal 2020. Property taxes have remained consistent at roughly $24 million per annum.

Over the three-year time period, operating expenses have grown 16% to $866.6 million in fiscal 2022 from $746.9 million in fiscal 2020. Contract labor expenses increased to $34.9 million in fiscal 2022 from $7.9 million in fiscal 2020. This was the primary driver for a $55.2 million increase in wages to $463.7 million in fiscal 2022 from $408.5 million year over year.

S&P Global Ratings has assigned a BBB+ rating to the $292.9 million in total long-term debt outstanding. Below are key metrics compared with the S&P BBB+ median, according to VMC’s audited financials:
  • Total margin was negative 7.4% in fiscal 2022, down from 0.6% and below the 2.5% median;
  • DCOH was 78.8, down from 103.7 year over year and below the BBB+ median of 147; and
  • Debt to capitalization was 65% in fiscal 2022, an increase from 61% in fiscal 2021 and above the 30.5% BBB+ median.
Providence St. Joseph Health

Providence St. Joseph is responsible for a principal amount of the overall $1.7 billion in cumulative losses cited by the WSHA survey. It recorded a $424 million loss for the second quarter of 2022. The not-for-profit Catholic Health System operates 51 hospitals throughout the western United States including Alaska, among other facilities, and is sponsored by two ministries, Providence Ministries and St. Joseph Health Ministry. It has $6 billion in debt outstanding and Fitch Ratings downgraded it to A+ from AA in April. In January, the system separated Hoag Memorial Hospital Presbyterian from its obligated group. Hoag represented 7% of Providence’s operating revenue and 17% of its cash and investments.

For the six months ended June 30, Providence incurred a $934 million deficit of expenses over revenue, an increase from a $135 million deficit year over year. These results are pro forma the Hoag separation. June 2021 results including Hoag showed a $94 million deficit. EBIDA fell to negative $242 million for the six months ended June 30, down from positive $545 million pro forma EBIDA year over year. The state of Washington was the second largest driver of total revenue with 26% share of the pie, second to California, which accounted for 33% of Providence’s operating revenue.

Key, pro forma credit metrics are shown below:
  • Total debt to capitalization was 41.4% as of June 30, up from 34.1% year over year;
  • DCOH was 140 as of June 30, down from 161 year over year; and
  • Trailing 12-month maximum annual debt service coverage fell to 0.5x as of June 30, down from 2.7x year over year.
Confluence Health System

Smaller health systems are also feeling the pain. The Confluence Health Obligated Group, which includes Confluence Health, Central Washington Hospital and Wenatchee Valley Hospital, issued $103.8 million in Series 2015 revenue bonds. Fitch Ratings affirmed its A- rating with a stable outlook in June, but like its larger competitors, Confluence Health System is also suffering from increases in operating expenses.

Operating expenses grew to $214 million for the quarter ended June 30. That’s an 11% increase from $192.4 million over the prior-year period, resulting in a swing to a $1.5 million loss from operations from an $11.9 million gain year over year. DCOH was 154 and historical debt coverage ratio was 4.34x as of Dec. 31, 2021.
Share this article:
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.
Thank you for signing up
for Reorg on the Record!