A suburban Chicago hospital saw its ratings raised several notches after joining forces with a better heeled system, highlighting the appeal of consolidation for independent hospitals that Moody’s Investors Service says shows no signs of slowing.
Moody’s this week raised Northwest Community Healthcare’s debt rating to Aa3 from A2 after security on $220 million of rated debt now is an obligation of Aa3-rated NorthShore University Health System’s obligation. S&P Global Ratings last week took similar action, lifting the previously independent hospital to AA-minus from A while also affirming NorthShore’s AA-minus rating.
Both rating agencies assign a stable outlook.
Northwest Community Healthcare
The 509-bed Arlington Heights, Ill.-based Northwest Community Hospital, which serves the northwest suburbs, became a subsidiary of the Evanston-based system Jan. 1 and its master trust indenture was replaced last week so the debt is now a NorthShore obligation. Northwest Community became a restricted affiliate of the NorthShore Obligated Group along with Swedish Covenant Hospital in Chicago, which was acquired early last year.
“The rating reflects NorthShore’s very strong balance sheet and our assessment of the system’s integrated business model, with six hospitals, a large employed physician group, and a significant outpatient presence in a demographically favorable service area,” said S&P analyst Anne Cosgrove.
The stable outlook reflects the expectation that NorthShore will maintain its “very strong balance sheet metrics and low leverage” as well as its market share position and that management will continue to proactively focus on cost-reduction strategies to mitigate revenue pressures.
The two announced their plans last summer in the midst of the COVID-19 pandemic, although they did not address the debt structure. Last year, Northwest Community reported finishing its last fiscal year with more than $600 million in revenues and NorthShore had about $2.2 billion.
The union broadens NorthShore’s reach into the northwest suburbs while it allows Northwest Community to join a wealthier system with improved access to capital to finance investments and a wider array of specialists.
A years-long wave of consolidation has continued through the pandemic, with both systems joining forces to leverage their size as well as independent hospitals being scooped up by systems. Many in the sector had been struggling with pre-pandemic industry pressures from healthcare reform mandates, uncompensated care, and changing demographics. The pandemic has further strained hospital operations despite federal relief.
Moody’s expects partnerships and affiliations will continue at a robust pace this year extending a decade-long trend for both not-for-profits and for-profits, the rating agency said in its April healthcare quarterly report.
“The COVID-19 pandemic will accelerate partnerships for smaller hospitals and physician groups as patient volume recovery is uneven and expenses remain elevated, leaving many of them vulnerable to further operating disruption,” Moody’s wrote. “Partnerships provide an opportunity to lessen financial challenges, such as an increasingly more expensive workforce.”
Relief from the CARES Act signed in March 2020 and a federal advance on Medicare payments helped ease operational strains from the pandemic, but the relief is temporary, volumes may take some time to fully recover and the Medicare advances must be repaid.
“Larger health systems will pursue mergers and acquisition to increase market share through geographic and service line diversification,” Moody’s said. “As COVID-19 takes a toll on financial performance, smaller providers will look to partner to gain access to clinical, strategic and financial resources and reduce labor, supply and information technology expenses.”
Large not-for-profit systems will continue to look to increase scale and revenue diversification in consolidation with the ability to move into new markets, also an attractive factor. While consolidation has bolstered revenues, the strategy is not guaranteed as it can pressure leverage levels and poses integration challenges.