Standard & Poor's Ratings Services has revised its rating outlook to negative from stable on the Daughters of Charity Health System, a six-hospital California health system with facilities in both San Francisco and Los Angeles.
S&P affirmed its 'BBB' long-term rating on the system's $463 million in revenue bonds, which were issued by the California Statewide Communities Development Authority.
The downgrade was based on accelerating operating losses at the health system in 2010, which have continued through the first quarter of fiscal 2011 at an even higher pace.
S&P credit analyst Cynthia Keller says Daughters must implement “fundamental changes” to its cost structure to complement for volume and revenue declines before the rating outlook would return to stable. Even more ominous, Keller suggested that without demonstrated progress during 2011, “it is possible that the rating could be lowered.”
Keller doesn’t appear to think that a turnaround is in the cards for Daughters, although that won’t be due to lack of effort. The health system is trying to make its management structure more centralized in an effort to decrease fixed costs throughout the system.
Nevertheless, S&P says the health system has a plateful of issues to deal with in 2011, including labor issues, its physician relations strategy, and the magnitude of seismic needs at its St. Vincent Medical Center in southern California.
Unfortunately, it’s the “mission-driven nature” of the health system that makes a turnaround less likely. The Daughters facilities serve a primarily indigent urban population for which there is not a lot of competition. Many hospitals serving such a population have closed and left more of a burden on DCHS, Keller said.
The system receives a majority of its reimbursement from the state and federal government, both of which “have significant budgetary pressures of their own,” according to S&P.
Now that’s an understatement.