Credit rating agency downgrades Fairview, citing continued weakness in financial services

Moody’s downgraded its debt rating on Fairview Health Services, forecasting lower margins for the nonprofit amid higher labor costs and already cut patient numbers at many hospitals and health system clinics.

The change does not take into account the Minneapolis-based company Merger proposed by Fairview with Sanford Health, based in South Dakota, or a University of Minnesota proposal to buy its university hospital in Fairview, the rating agency said.

According to the Jan. 18 report from Moody’s Investors Service, issues with labor spending and volume trends compound existing challenges with inflation and the steady transfer of funding from Fairview to the U.

Moody’s assesses the creditworthiness of borrowers and publishes reports that are used by lenders and potential investors.

“The downgrade … reflects Moody’s expectation that weak operating performance, which began before the pandemic but worsened in 2022, will be difficult to reverse,” the report said.

In a statement, Fairview said the report “reflects the current challenges we face and the urgency with which we must address them.”

“Joining forces with Sanford is a proactive and bold change that will lead to innovative solutions and ensure that we can continue to provide care to Minnesotans in the future,” the health system said. “Together, we can strengthen our financial footing and improve the patient and provider experience in ways that neither Fairview nor Sanford can do alone.”

When the merger was first announced, Fairview chief executive James Hereford pushed back in an interview that the merger was necessary to solve its financial problems. In the first nine months of the year, Fairview posted an operating loss of $248.5 million.

“We are confident there is a path for us, as things stand,” Hereford said in November. “That [merger] it’s not about that.”

Last month, Moody’s also downgraded Minneapolis-based Allina Health Services, despite Allina’s rating being three notches higher than Fairview. Health systems are among the largest in the Twin Cities.

In a separate credit opinion report released Jan. 19, Moody’s said Fairview’s status as a university healthcare system through its connection to the U continues to be a “distinguishing factor” in the competitive market. health care of the twin cities. A merger with Sanford and/or the U acquiring its University Hospital “would result in significant changes to Fairview’s overall profile,” the ratings agency said.

“The recently announced Sanford transaction and ongoing university negotiations will likely require management’s attention at a time when Fairview faces a challenging operating environment,” Moody’s said. Referring to Hereford, the agency added: “This risk is partly offset by the presence of a CEO with a track record [academic medical center] experience.”

The downgrade recognizes a serious deterioration in Fairview’s performance that appears to date back to 2018-19, said Nancy Kane, a hospital finance expert at Harvard TH Chan School of Public Health.

Fairview has seen a marked reduction in its operating cash flow margin, Kane said in an email. The situation that might not be helped by Fairview selling the University Hospital, she said, but might instead require renegotiating the complex deal through which Fairview provides regular funding to the U.

The Affiliate Agreement currently runs through the end of 2026. Last year, Fairview provided over $83 million to support medical education, research and patient care at the university.

U officials said they don’t understand why Fairview is losing money given the volume of patients university doctors are treating within the health care system. They also argue that Fairview’s level of annual financial support — which increased significantly from 2018-19 — is now in the middle of the pack compared to other academic medical centers.

“When you look at that, it’s miniscule compared to the…$6.2 billion [in revenue] company that Fairview is,” Dr. Jakub Tolar, dean of the U.S. School of Medicine, said at a Jan. 12 news conference. academic support.

Moody’s said higher labor costs, service constraints and difficulty transferring patients to subacute environments are exacerbating an already challenging operating environment at Fairview.

Several Fairview hospitals were among those who agreed in December to new contracts with the Minnesota Nurses Association, offering salary increases of 17% to 18% over three years.

“Recent union activity, including a three-day strike, will add to this burden,” Moody’s wrote. “Fiscal 2022 inpatient admission trends at Fairview remain well below pre-COVID levels (down approximately 18%), although management expects some growth over the course of the year. fiscal year 2023.”

Moody’s shares downgraded the rating of about $1.6 billion in Fairview debt from A3 to Baa1. The outlook is negative, according to the rating agency.

Moody’s last lowered its rating on Fairview’s debt in February 2020, citing demands for increased funding from Fairview to the U as well as losses from former HealthEast operations. Fairview and HealthEast, which operated primarily in Metro East, announced a merger in 2017.

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