The red ink continues to spill at Butler Health System and Excela Health, with combined operating losses exceeding $64 million for the nine months ending March 31 as the newly minted health system struggles for footing as one entity, financial disclosures reveal.
BHS reported a loss from core medical operations of $35 million on operating revenue of $293 million for the nine months of the fiscal year ending June 30; Excela lost $29.3 million on operating revenue of $485 million, new financial reports indicate.
The losses have been mounting quickly: The most recently reported BHS losses were more than quadruple the $8.1 million lost in operations a year ago while the Excela losses were nearly triple the $10.4 million operational loss during the same period in 2022.
Increases in outpatient hospital surgeries at both institutions, which merged in January but continue to keep separate books for accounting, weren’t enough to overcome an erosion in patient admissions overall, declining emergency department visits and number of inpatient surgical procedures performed at both systems when compared to a year ago.
The flood of red ink prompted Moody’s Investors Service on Tuesday to downgrade Excela’s revenue bond rating to Baa2 from Baa1, leaving bonds at investment grade, with a “moderate credit risk.” Excela has about $145 million in debt outstanding.
“The downgrade to Baa2 reflects significant hurdles to restoring better margins following a multi-year trend of weak operating performance, which has contributed to a tempering of Excela’s liquidity profile,” Moody’s wrote in a Tuesday review. “Butler Health is dealing with similar financial challenges and is in violation of its debt service coverage covenant.”
The two systems, which officially merged Jan. 1 — but have yet to pick a new name — face intense competition from far bigger Western Pennsylvania rivals, Allegheny Health Network and UPMC. In addition to competitors, both AHN and UPMC are big health insurance payers for Excela, making the prospect of higher reimbursement for delivering medical care a challenge.
Consultants have been hired by BHS and Excela to help find a way out of the financial mess, Moody’s said. Moreover, the problems are similar to those other hospital groups are dealing with, Tom Albanesi, CFO of the new system, said in a prepared statement.
“We continue significant and diligent efforts to eliminate our losses,” he wrote. “We also continue to be transparent and cooperative with our banks, bondholders and rating agencies as we execute our financial turnaround initiatives.”
Specifics of the turnaround initiatives were not disclosed.
The losses dropped Excela’s debt to equity ratio to 30.1%, which compares to 65% required by its bond covenants as a measure of financial stability. Debt service coverage at BHS on a rolling 12-month basis, a key measure of its ability to meet debt payments, dropped to negative 1.58; BHS’ loan covenant requires a ratio exceeding 1.25.
Merging the two systems “should help strengthen the newly established health system’s market position as well as provide synergy savings and greater negotiating leverage,” Moody’s wrote. But “competition will continue to heighten with ongoing encroachment from larger, more tertiary Pittsburgh based providers.”
Kris B. Mamula: kmamula@post-gazette.com
First Published: May 16, 2023, 7:57 p.m.