Independence Health System losses widen to $43.2 million as of June 30
For the second year in a row, Independence Health System has lost more money than the previous year.
The Butler portion of the health system on Tuesday, Nov. 7, reported an operating loss of $43.2 million for the year ending June 30 — compared to the $22.7 million loss from a year ago — as the system of hospitals and doctors’ offices struggles for footing in a new merger with Greensburg-based Excela Health.
Butler’s loss means the fledgling five-hospital Independence Health System, launched in January with Excela, had a combined loss from operations of $79.3 million for the 12 months ending June 30. The red ink continued to spill in September, which saw an operating loss of $12.9 million, 30% higher than the $9.9 million loss the system had projected.
Expenses, fueled by higher labor costs, outpaced revenue for the year ending June 30. Operating revenue inched up less than 1% to $396.4 million for the year while operating expenses rose 4.2% to $439.7 million.
In a conference call with bondholders Tuesday, Independence Health System officials said aggressive negotiations were underway with private insurers to increase reimbursement for medical services to keep pace with operating costs inflated by the COVID-19 pandemic. The talks were expected to yield higher payments to the system starting in January, according to the health system.
Highmark’s Blue Cross Blue Shield plans and UPMC Health Plan are among its biggest payers, making up 27% of patient revenue.
“This board is well aware that we have some structural issues to work through,” Independence president and CEO Ken DeFurio told hospital bondholders. “The cost issues are significant and we can't simply adjust our prices up in response to cost increases.”
In addition to an array of urgent care centers, clinics and other outpatient facilities, Independence Health System operates the 283-bed Butler Memorial Hospital in Butler and Clarion Hospital in Clarion County, which has 67 beds. In 2022, Butler Health System reported $127.6 million in long-term debt.
The health system’s immediate concern was a missed debt service coverage ratio requirement, a metric based on net revenue, which measures whether the system has enough money to pay debts. The health system’s bond covenant, which it wasn’t expected to meet through 2024, requires a debt service coverage ratio exceeding 1.10, but the system reported a negative ratio of 2.52 as of June 30.
During the call with bondholders, DeFurio emphasized that Independence was current on its loans.
“We’ve never missed a payment and we don’t intend to,” he said.
Independence CFO Tom Albanesi told bondholders that Charlotte, N.C.-based Truist Bank had agreed to waive the debt service requirement as long as BHS continues making loan payments.
Among its debts is $20 million BHS borrowed in 2015 to build a medical office building, with $15 million remaining outstanding as of December. But the system isn't expecting to meet the loan's debt service requirement through 2024.
After tripping the requirement, BHS hired Washington D.C.-based turnaround adviser FTI Consulting Inc. for help. Without intervention, BHS was on track to lose between $53 million and $68 million annually from operations over the next three years, the system said.
But working with the FTI, which has offices in Pittsburgh and elsewhere, BHS came up with a savings and revenue enhancement plan that will yield $64.5 million annually by 2025, including $39.2 million in fiscal 2024. Among the initiatives was the elimination of 126 full-time positions, and contracting out revenue cycle management, which is intended to improve reimbursement and collections.
The health system is projecting a pared down operating loss of $22.8 million for the fiscal year ending June 30, 2024, which would tamp down system losses to the level seen in 2022. Operating revenue is forecast to increase 12.5% by June 30, 2024 to $446.1 million from $396.4 million as of June 30.
