Nonprofit health systems are increasingly pursuing new growth opportunities as the ongoing wave of mergers and acquisitions in the sector limit growth prospects in their home markets.
But these new growth strategies carry varying degrees of credit risk that could potentially strain health systems’ balance sheets, according to a new report by bond credit rating agency Moody’s Investors Service.
The report focuses on three key growth drivers: new businesses, new markets and non-traditional partnerships.
NEW BUSINESS VENTURES
Moody’s predicts that a constrained revenue growth environment will drive more not-for-profit healthcare systems to enter into new businesses outside their traditional scope of operations — including health insurance, long-term care and skilled nursing, and rehabilitation facilities.
These new ventures present the greatest risk in terms of debt and liquidity levels, because they typically fall outside management’s traditional core expertise.
Expanding into new geographic regions lets health systems leverage their brands, access more patients, build economies of scale and gain strength in negotiations with insurers, according to the report.
This avenue for growth presents relatively low credit risk to the health systems, as running the new entities would fall within management’s core competencies.
Joint ventures between health systems and other companies present less risk of balance sheet or income statement problems than does a full-on merger or acquisition. The reason: With joint ventures, assets and liabilities usually aren’t combined and losses are shared. Also, the debt obligations of each joint venture partner typically remain separately secured.
WHY THIS MATTERS
It’s vital that health systems and other providers have clarity on the potential financial risks of any growth strategies they’re considering, of course. Otherwise they could end up taking on excessive debt levels or encountering other issues that could hurt their credit rating.
For example, the report highlights ProMedica Health System, which expanded its service offerings last year by acquiring the second-largest for-profit senior care company in the U.S. While the acquisition nearly doubled ProMedica’s revenues, it also increased the company’s leverage position and diluted liquidity. Other challenges around management and restructuring further increased credit risk.
Tapping new income streams and markets are goals that have become increasingly important to hospitals, many of which are struggling financially and are seeking new ways to boost revenues and profits.
That’s led to such joint ventures as Sutter Health|Aetna (a partnership between the Sacramento, California-based health system and the national insurer that offers self-insured preferred provider organization health plans) and Experience Health–a joint venture between Blue Cross and Blue Shield of North Carolina and Duke University Health System. BCBS North Carolina also entered into a contract with five major health systems to share in outcomes and cost.
It’s also driven health systems to look beyond their local borders for growth. The report notes that New York-based Northwell Health and the Cleveland Clinic Health System have acquired or partnered with acute care providers in Florida to attract both full-time Florida residents and snowbirds who are familiar with these health systems’ names and reputations.
ON THE RECORD
“Over the past two decades, multiple systems have entered the health insurance business through startups or acquisitions with varying degrees of success,” said Meredith Moore, assistant vice president and analyst at Moody’s. “If successful, a health insurance product can provide a hedge against declining patient revenues, limit patient leakage to other systems and play a key role in population health strategies. However, managing a health insurance plan requires actuarial expertise in underwriting, pricing know-how, strong customer service and marketing skills, a large brokerage network and a proven ability to project usage rates.”
Mark Klimek is an independent writer and editor with 20 years’ experience covering financial issues, healthcare and more.