SoutheastHEALTH bond rating holds steady; profitability returns

After a number of measures intended to stop a series of downgrades, SoutheastHEALTH's revenue bond rating held steady last quarter, maintaining a B grade.

Fitch Ratings, a provider of credit ratings, commentary and research, revised the rating watch for SoutheastHEALTH from negative to evolving on $90.5 million in Cape Girardeau County Development Authority hospital revenue bonds (series 2007) issued on behalf of Southeast Missouri Hospital Association.

SoutheastHEALTH also has $60 million in direct placement debt (series 2013) that Fitch does not rate. Of that amount, $29 million is outstanding.

Through the six-month period ending June 30, SoutheastHEALTH generated an 8.6 percent earnings before interest, taxes, depreciation and amortization margin "with steady results expected through year end," according to Fitch's online report; reviews by two external auditing firms support those estimates.

SoutheastHEALTH president and CEO Kenneth Bateman said he was pleasantly surprised by the hospital system's profitability this year.

"I was expecting us not to see a profit until probably the end of this year," Bateman said. "We actually started turning our first profitable month in June."

Bateman said SoutheastHEALTH has been profitable during each month in the June-to-September period except August, when several physician vacations resulted in a loss. He said the organization turned a $1.3 million profit in the four-month period.

"So on an annualized basis, our trend right now is close to about a $4 million profit, which is a (significantly) different picture than what it was in 2014."

He called the hospital's turnaround plan "solid" and said it is "well on its way" to financial stability.

Repayment of the 2013 bonds would "significantly deplete SoutheastHEALTH's liquidity position," according to Fitch's online report. SoutheastHEALTH is expected to obtain a waiver, however, from bondholder Regions Bank in the coming months, the report said.

Bateman said Fitch has "indicated that they are going to change our outlook from negative to at least stable, or positive, and that they will give us a credit upgrade." He said the upgrade or outlook cannot be raised until the waiver negotiations are complete.

Once negotiations conclude, he said, "we expect to have an upgrade to our outlook and our credit rating."

Bateman did not offer a time frame for the expected waiver, but said negotiations have been ongoing for much of this year.

Failure to obtain the waiver of SoutheastHEALTH's debt service coverage covenant violation, resulting in acceleration of the bonds and a cross-default to the 2007-series bonds, would "prompt negative rating pressure," the report said.

However, assuming the waiver is obtained, Fitch reported, "upward rating movement is likely" if the hospital is able to sustain improved operating results through the 2015 fiscal year.

SoutheastHEALTH's money problems became apparent in 2014.

Billing and revenue-cycle issues in 2013 that corresponded with a new electronic medical-records system triggered a rating downgrade.

Bateman said the hospital has spent a lot of time fixing the billing system.

"Cash collections on an annualized basis this year are going to be about $25 million more than what they were in 2014," Bateman said, which gave the hospital the ability to pay down an additional $11 million to vendors.

SoutheastHEALTH runs a computer system called Soarian, recently acquired by Cerner. Bateman said the hospital is in negotiations with Cerner about switching to Cerner Millennium.

He said he expects the contract to be complete before end of the year, at which point there will be a three-month design phase to ensure the program is adequately planned. After that, Bateman said, installation would take about 18 months.

He said the switch will allow for all patient records to be kept in a single database.

"But ironically ... we want to keep the billing system, the system that gave us the most heartburn," Bateman said. "Well, now that we've got the system fixed, and with APEX we've added a lot of tools on top of the billing system now."

He said he has seen what can happen when billing program installation goes bad and doesn't want to repeat that.

"We're going to interface the billing system into the Cerner system so we don't replicate our billing issues that we had in 2014," Bateman said. "Down the way, we'll convert the billing system, but we want to make sure that everything else is running fine. And then we'll address billing."

More than half of losses in past were billing issues, he added.

In 2014 and early 2015, the hospital lost a lot of employees through attrition, Bateman said, but hundreds of people have been hired to bring staffing levels back up.

"Most hospitals will experience a 10 percent turnover," Bateman said. Southeast has about 2,500 employees systemwide.

"That's why I'm not a believer in layoffs as a solution, because your normal attrition rate, your normal turnover rate, will allow you to flex your staff to where you need to be," he said.

"... It's also given us the ability to operate at a more productive level," Bateman said.

He said the hospital now has a $10 million to $12 million lower payroll, even after hiring and examining staffing efficiencies.

In another sign of improved economic heath, SoutheastHEALTH gave raises this month for the first time in at least two fiscal years. Beginning with the first payroll period in October, employees saw a 2 percent increase, Bateman said, adding the plan is to have an increase in 2016 as well.

John Thompson, former president of the SoutheastHEALTH board of directors, owes the success to the organization's leadership.

"There are financial actions that have been taken, but who drives those?" Thompson said. "They're always individually driven. And I have to again say we've selected the perfect leader and executive to lead the turnaround.

"There's been a lot of indications that the quality has never wavered," Bateman said. "... Now that we're profitable again, I think we're well on our way to becoming a very strong organization."

kwebster@semissourian.com

(573) 388-3646

Pertinent address:

1701 Lacey St, Cape Girardeau, MO 63701