Lebanon
The analysts’ notes acknowledged progress by D-H in extracting itself from a multi-year financial bind, but they also stressed that the Lebanon-based health system remains in a precarious financial position.
Still, after months of financial challenges and other controversies, health system officials welcomed the analysts’ acknowledgment of progress.
“We are encouraged by our financial performance in the first quarter of fiscal 2017, but we realize that there is still work to be done in returning our budget to a sustainable positive financial margin,” Rick Adams, a D-H spokesman, wrote in an email.
D-H posted a tiny operating margin of about 0.1 percent, or $589,000, in the three-month period that ended Sept. 30.
Revenue during the quarter was about $469 million.
D-H’s goal is to post a $10 million operating profit during the final quarter of the current fiscal year, which began July 1 and will end next June 30, and to break even for the full year, Fitch analyst Margaret Johnson wrote.
By the end of fiscal 2018, the operating margin should be in a range from 2 to 3 percent, she added.
Just before Thanksgiving, both Fitch and Standard & Poor’s removed D-H from their watch lists for credit downgrades, lifting warnings they had issued in August. The credit raters concluded that D-H’s financial health hadn’t changed. S&P affirmed its “A-” rating with a negative outlook for D-H, reflecting its strong capacity to meet its financial commitments to bond holders but some susceptibility “to the adverse effects of changes in circumstances and economic conditions.”
The negative outlook was “not surprising, given our weaker-than-expected performance” in fiscal 2016, Adams, the D-H spokesman, wrote.
Fitch held to its “A” rating with a stable outlook for D-H, indicating “low credit risk” but some vulnerability to “adverse business or economic conditions.” Adams said hospital officials were pleased by the Fitch assessment.
The bond raters remain wary. S&P analyst Jennifer Soule cited D-H’s “weak financial performance in fiscal 2016 … and some uncertainty about its ability to recover in fiscal 2017” as items of concern. Possible affiliation deals with Elliot Hospital in Manchester, N.H., and other hospitals add to that uncertainty, she wrote.
Johnson also warned that the health system’s credit rating is fragile: “D-H has no flexibility to absorb further operating reversals and remain at its current rating level.”
More details about the deficits, revenue shortfalls and expense increases that preceded recent cuts and retrenchment at D-H became public last weekend, as the health system posted its audited financial statement for the fiscal year that ended June 30 on the website of the Municipal Securities Rulemaking Board.
D-H sustained a $39 million operating loss for fiscal 2016. After accounting for investment losses and the value of newly acquired assets, total revenue at D-H fell short of expenses by almost $45 million, according to the filing. A year ago, D-H’s operating deficit was a little over $9 million but total revenue exceeded expenses by about $71 million.
The health system, which comprises five hospitals and Dartmouth-Hitchcock Clinic, which has six main locations, posted fiscal 2016 revenue of nearly $1.8 billion. The health system has more than 9,000 employees, according to its tax returns.
D-H had run into a “major glitch” due to problems that resulted from the nearly simultaneous launches of new billing and technology systems, which had inflated its revenue projections by about $50 million, Soule wrote.
The D-H deficit was also worsened by “a series of one-time expenses at Cheshire Medical Center,” a D-H affiliate in Keene, and by development costs for ImagineCare, a for-profit, remote health-monitoring venture, according to Johnson, the Fitch analyst.
D-H’s financial woes weren’t all of its own making.
“Hospital systems are certainly facing … changing economics in health care,” said Steve Ahnen, president of the New Hampshire Hospital Association. New Hampshire’s 24 nonprofit hospitals now, as a group, have operating margins that average under 1 percent, down from about 2.5 percent in 2008, he said.
D-H’s efforts to restore its budgetary health — a process that has extended over three fiscal years, according to Soule — have occasionally been painful.
The biggest jolt came in September when Chief Executive James Weinstein’s announced that D-H would lay off up to 460 people. In the end, a total of 84 employees lost their jobs, according to D-H officials.
The job cuts were expected to save $32 million, while “supply chain and physician productivity initiatives” were looked to produce another $48 million in lower expenses or higher revenue, according to Johnson.
Then, in November, Mark Israel, former director of D-H’s Norris Cotton Cancer Center, filed a lawsuit in Grafton Superior Court alleging that D-H officials, as they scrambled to fill the deficit hole in fiscal 2015, had improperly diverted $6 million of money raised from donors, including participants in the Prouty, the center’s hallmark annual fundraiser. D-H officials have responded publicly by saying they “took action to ensure proper administration, oversight, and compliance with required accounting standards and state law governing all charitable donations.” The lawsuit is pending.
A downsizing of Dartmouth College’s Geisel School of Medicine has also presented challenges, including the transfer of the psychiatry department from the medical school to D-H. Some psychiatrists who had worked for the college under a longstanding contract to supply professional services at New Hampshire Hospital in Concord, the state’s main facility for people with serious mental illness, balked at going to work for D-H. That drew critical attention to D-H’s bid to take the college’s place under a new, $36.6 million contract, and the dispute bubbled into an issue in the recent race for governor.
On Monday, 19 members of Geisel’s psychiatry faculty filed a lawsuit alleging that the college violated their employment contracts and college policy that provides for severance pay when it laid them off. College officials have declined to comment about the suit. (See related story, page B3.)
D-H’s new financial disclosures describe other factors that contributed to the health system’s eight-figure losses.
One big item was the growth of unpaid bills at D-H, which notes in its audited financial statement that it “grants credit without collateral to patients.” D-H’s “provision for bad debt” tripled in one year, leading to a write off of about $55 million, up from nearly $18 million the previous year.
The smaller fiscal 2015 writeoff reflected D-H’s “focused effort to reduce its accounts receivable, in preparation for the implementation of the (new) billing system,” while the fiscal 2016 write off was at “a more normal level,” Adams said.
D-H’s losses also came despite a jump in revenue from a portion of New Hampshire Medicaid’s $200-million-a-year program that taxes and provides support to hospitals. D-H’s so-called disproportionate share payments totaled almost $57 million in fiscal 2016, up from about $10 million the previous year. The payments offset the provider tax paid by D-H, which was $58.6 million in fiscal 2016 and $52 million the previous year.
D-H’s creditors had been counting on an increase in disproportionate share payments to provide a big financial boost to the health system, but were disappointed when the gains were wiped out by “technology challenges and misunderstanding of revenue and expense management,” Soule, the S&P analyst, wrote.
D-H comprises Mary Hitchcock Memorial Hospital and Dartmouth-Hitchcock Clinic, D-H’s holding company and three smaller hospitals D-H controls: Cheshire in Keene; Mt. Ascutney Hospital and Health Center in Windsor and New London Hospital in New London.
Mt. Ascutney was the only of those hospitals that posted a gain from operations — albeit a razor-thin $106,000 — and saw total revenue exceed total spending by $266,000.
The latest statement also includes four months of financial results from Alice Peck Day Memorial Hospital, the Lebanon neighbor that D-H took control of through an affiliation deal executed on March 1. In the transaction, D-H acquired assets valued at $46.8 million including $16.6 million in real estate and facilities, $12.6 million in cash and $10.3 million in accounts receivable. D-H simultaneously assumed $28 million in APD obligations, including $17.2 million in long-term debt, and posted an $18.8 million gain in net assets.
D-H’s 2015 audited financial statement excluded APD and included only four months of results from Cheshire, where D-H took control on March 1, 2015.
During fiscal 2016, D-H’s net assets fell by 19 percent, to $489.5 million at the end of June from $603.7 million a year earlier. Much of the $114 million decline was accounted for by an increase in pension and retirement liabilities, which rose $82 million to $272.5 million.
The longterm debt of D-H as of June 30 was $620 million, and interest rates on the outstanding bonds and other obligations ranged from 1 percent to 6 percent, according to the audited financial statement.
On July 1, Cheshire, Mt. Ascutney and New London hospitals formally took on a share of the responsibility to repay D-H’s long-term debt. As part of the transaction, D-H assumed $28 million in long-term debt from Cheshire and $25 million from New London.
The costs D-H incurred to provide charity care declined 33 percent, to $12.3 million in fiscal 2016 from $18.4 million the previous year. The hospital said the decline in such spending reflected a corresponding decline in the number of patients without insurance as a result of the Affordable Care Act, which provided an online market for individuals to buy health insurance and was used by New Hampshire to expand coverage under the Medicaid program for low-income people.
Rick Jurgens can be reached at rjurgens@vnews.com or 603-727-3229.