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Rating agencies note weaker performance at Catholic Health

Moody's Investors Services revised its forecast for Catholic Health from stable to negative in its latest analysis, noting the hospital system's weaker operating cash flow margins and increased outpatient competition.

The two other major ratings agencies, Fitch and S&P Global, have forecast a stable financial outlook for the hospital system, but also noted weaker performance than in the past.

All three ratings agencies affirmed their current bond ratings for the hospital system.

What does it all mean?

Catholic Health is financially healthy, the hospital's chief financial officer said, but its operating income and cash flow trend recently have slid a little in a market in which the population is not growing, and the competition for patients in a changing and complex health system is strong.

"We've had 14 consecutive profitable years, and we're headed toward a 15th year of profitability," said James Dunlop, executive vice president and chief financial officer.

"We recognize the weaker performance Moody's cited compared to peer hospital systems, but we're confident in our ability to improve. These are issues that can be remedied," he said.

Moody's noted the potential for problems from a handful of issues, such as operating cash flow and pension obligations.

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Catholic Health includes Mercy, Kenmore Mercy and Sisters hospitals, as well as the St. Joseph campus in Cheektowaga. Based on more than $1 billion in operating revenue in 2016, the system ended the year with a slim operating margin, earning $149,000 from operations and $5.6 million on the bottom line, according to the S&P analysis. Operating income was significantly below the $7.7 million earned from operations in 2015, a change management attributed to a decline in cardiology patients related to the departure of two heart surgeons and underperformance of insurance contracts that incorporate financial risk for the hospital system.

Catholic Health holds a slight lead competitively in Erie and Niagara counties, with about 43 percent of the market share. Its main competitor, Kaleida Health, has a slightly lower market share in the two counties, according to the rating agencies. Kaleida uses loans backed by the Federal Housing Administration and, as a result, is not subject to such ratings.

Catholic Health officials said replacements have been recruited for the heart surgeons, and the system made a major investment this year by acquiring two cardiology groups, Buffalo Heart Group and Cardiology Group of Western New York.

Highlights from the reports:

· The Moody's downgrade to negative reflects the third year of weaker operating cash flow margins and challenges to sustaining improvement given increasing outpatient competition. Cash flow is insufficient to cover front-loaded debt service and normal capital needs, requiring the health system to increase leverage in the absence of operating improvement, the agency said.

· The system has relatively low leverage — its long-term debt is $194.7 million — and favorably moderate 2.7 times debt-to-cash flow. Its manageable debt gives the system financial flexibility to refinance and make improvements.

· An organizational strength is its strong alignment with a large physician group, Catholic Medical Partners, enabling coordinated insurance negotiation and medical care.

· After two years of positive but lower operating results, future affirmation of the BBB+ rating by Fitch and S&P will depend on improving results compared to the system's peer health organizations.

· Management plans to significantly increase pension contributions with the goal of increasing the funded status from about 50 percent to 80 percent by 2026.

Dunlop characterized the rating agencies as reporting positive performance but wanting to see better results, especially in comparison to medical organizations that Catholic Health is compared against.

"It's not as though we're losing money," he said. "There is no reason for concern. It's a matter of checking the boxes that the agencies have identified, so we'll be fine when they re-look at us."

Moody's affirmed the agency's current bond rating of Baa1 for the hospital system. Fitch Ratings in March, despite noting weaker 2016 financial results, affirmed a BBB+ rating for Catholic Health. And, on Friday, S&P Global Ratings, affirmed its BBB+ rating on bonds issued for Catholic Health and its subsidiaries, reflecting a solid balance sheet.

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