Centra’s credit rating from Moody’s Investors Services, while still considered low risk, has been downgraded from A2 to A3 just months after the health care system reported a negative operating margin for the first time in more than a decade.
According to Moody’s, the credit outlook remains negative, which means there is a higher likelihood of a rate change in the future than if it had a stable outlook.
Centra, the area’s largest health care provider serving more than 500,000 people, has seen margins squeezed most recently by a slew of unexpected costs incurred with the implementation of a new electronic health record system.
Centra had an A2 stable credit rating from Moody’s from 2012 to 2016, but was downgraded in 2017 to A2 negative. On July 31 the rating again was downgraded, this time to A3. According to another credit rating agency, Standard & Poor’s, Centra’s A credit rating remains unchanged and the outlook is stable.
“This was expected, it shouldn’t be a surprise and I think we’re going to be OK long term,” Centra CEO Dr. Andy Mueller said last Thursday, one week after Moody’s released its credit opinion. “We’ve got a plan to get us back on track.”
In its credit opinion, Moody’s pointed to budget shortfalls in fiscal 2018 and 2019 “following disruptions from a major IT implementation and material losses at the wholly owned health plan” as well as turnover in management as factors behind the downgrade. An expansive turnaround plan put in motion this spring, Centra’s large market share, and Virginia’s recent Medicaid expansion and Medicaid rate enhancement worked in Centra’s favor.
Richard Gundling, a senior vice president at the Healthcare Financial Management Association, said right now most credit rating agencies are predicting there will be more downgrades than upgrades over the next year because of the elusiveness of profitability in the health care industry. Smaller systems, he said, will be under greater pressure.
Gundling said consumers can think of the ratings like their own FICO scores, which determine how much it costs to borrow money. A downgrade often means borrowing costs increase. An A3 rating tells investors these are investment-grade bonds and “still good to buy,” he said.
“It shows confidence,” Gundling said.
In detailing what it took into consideration, Moody’s wrote it expects Centra’s operating performance to improve through fiscal 2019 “though margins will remain weak.”
“Operating performance in fiscal 2018, and through unaudited first quarter of fiscal 2019 is significantly below expectations” following the rollout of new IT, losses at Piedmont Community Health Plan and increased labor costs, Moody’s wrote. “Approximately $30 million of one-time expense items, the majority of which are related to the IT install, in fiscal 2018 with an expected similar amount in fiscal 2019, partly contribute to the material decline in margins.”
Financial disclosure documents made available through the Municipal Securities Rulemaking Board at the end of the first quarter of this year show the capital investment in phase one of the new IT system Cerner has been $73.5 million. Intended to streamline operations at Centra, the system has tripped up billing and collections and introduced new problems, according to officials.
In April of 2016, Centra announced it would roll out Cerner that July and estimated it would be a $100 million investment over 10 years. Last week Centra noted in an email the increased costs are also partially because of “add-on features” and delays in decommissioning the old system.
The program was expected to be in place systemwide by the spring of 2018. Today Centra continues to meet with Cerner representatives and has slowed the installations, expecting it to continue through late 2020. Plans specifically to bring cancer and cardiology services online have been delayed.
“The reality is we have had some struggles,” Mueller said in May, shortly after becoming CEO of Centra, replacing former CEO E.W. Tibbs, who resigned in October of 2018.
In June, year-to-date operating losses stood at $15.5 million, according to Centra.
Despite the implementation of a turnaround plan this spring, according to Moody’s “there has been no demonstration of a sustainable improvement.”
“It’s too early to see whether or not we’ve attained all the results yet,” Mueller said last Thursday. “I’m confident in the plan, however, and think it’s very achievable, and very realistic. For an organization our size it’s effectively a 2% reduction in expenses over a three-year period.”
One-third of the turnaround plan has been implemented, the first part of which included layoffs, restructuring, changes in staffing models, and management of overtime. In April several executive-level positions were cut and on May 18 managerial positions were eliminated. The focus now is on non-labor expenses, services purchased from vendors and making sure “we are as efficient and effective as we need to be,” Mueller said.
“We’re doing everything we possibly can as a management team to prevent us from putting ourselves in a situation where we have to lay people off again,” Mueller said, adding he does not intend for there to be more layoffs.
There are also steps being taken to increase the amount of cash Centra has on hand, something investors call Days Cash on Hand. That cash is what allows a company to weather unexpected storms and “is always king,” said Gundling. “It’s all about liquidity.”
Mueller also addressed what Moody’s called “material losses” at Centra’s Piedmont Community Health Plan, the only locally owned insurer on the federal health insurance marketplace.
“First of all, PCHP actually made money in 2018. OK, I want to be clear about that for the record, because that’s factual. OK. However, over the preceding several years, it has struggled to turn a profit. And so we are continuing to evaluate what opportunities are available to help make PCHP more effective,” Mueller said.
He did not provide specifics about those financial losses but in May said PCHP could play a pivotal role in the future of Centra.
“... They manage risk professionally, it’s what they do, so there’s a reality we can start to learn from them and then start to apply the lessons that they’ve learned around managing the health of a population back into our clinical operations to enable our physicians and other caregivers to make better decisions about care of those patients directly. ...” Mueller said.
Over the course of the next year, Mueller expects Centra to make progress on the performance plan, despite what quarterly reports may or may not show. He said as a not-for-profit health care system he is focused on the long term, rather than generating money for investors. Centra already is, in terms of top-line revenue, seeing the positive effects of Virginia’s Medicaid expansion and the bump in reimbursement rates. Over time, he said, Centra will see a more direct impact on the bottom line.
Amy Trent is city editor for The News & Advance. Reach her at (434) 385-5543.