Surgical volume is down; staffing costs are up
Western New York health system leaders have brought it up again and again this year: The post-pandemic period is pummeling balance sheets like never before.
The latest example: Moody’s Investors Service, the large bond credit rating business, earlier this month downgraded Buffalo-based Catholic Health System’s rating further into non-investment-grade territory. The drop from B1 to Caa2 indicates very high credit risk for investors in Catholic Health’s bonds and will drive up its borrowing costs.
What Moody’s analysts see at Western New York’s second-largest health system: slow-to-return patient volume, significant cash declines and continued, albeit improving, costs for high-priced travel workers.
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“Despite progress reducing agency costs and ramping up net hires, it will be difficult to reduce cashflow losses quickly, given labor challenges amid national shortages and the costs of the new union contract, as well as volumes that remain well below pre-pandemic levels,” Moody’s analysts wrote in their report.
Moody’s noted some strengths, too, namely Catholic Health’s status as a major Western New York health provider with annual revenue of $1.2 billion.
And it’s worth noting that Catholic Health is certainly not the only Western New York hospital struggling financially. Simply, there is better visibility into Catholic Health’s recent numbers because it goes to the market and secures bonds publicly. Kaleida Health, meanwhile, is not subject to such credit ratings because it uses loans backed by the Federal Housing Administration.
Through the first nine months of 2022, Catholic Health recorded an operating loss of $138 million, according to a required disclosure to investors after a bond issuance this year.
The system had budgeted for a $55.2 million loss through the first nine months, meaning it is roughly $83 million behind plan.
Several factors have played into that.
Operating revenue totaled nearly $906 million through Sept. 30, which is about $50 million below budget.
Behind that: The state’s restrictions on elective surgeries early this year during the Omicron surge created a surgical volume shortfall of 22% through the first two months of 2022. While surgical volume recovered some, a “lack of adequate anesthesiology coverage” hindered the system’s ability to realize full operating room capacity in the second and early third quarters, the disclosure noted.
At the end of September, surgical volume remained short of budget by 11%, representing a revenue impact of $42 million.
The system’s home care visits also are 12% behind plan, the result of ongoing labor challenges.
Then, on the expense side, operating expenses through nine months totaled $1.04 billion, which was about $33 million over budget.
A major part of that: high costs on temporary agency staffing.
Through the first nine months, Catholic Health has used agency resources to staff about 410 full-time-equivalent positions in its facilities. That number had fallen to 360 FTEs as of October, down from the peak of more than 530 FTEs in March.
In total, Catholic Health has spent more than $84 million on agency staffing through Sept. 30 this year.
Looking at cash and liquidity, Catholic Health, as of Sept. 30, had cash and investments of $161 million, equal to 43 days of expenses.
Can Catholic Health things turn around?
While its finances have taken a hit, Moody’s analysts also see opportunity.
For one, Catholic Health is building Lockport Memorial Hospital, scheduled to open late next summer. That investment, Moody’s noted, could help Catholic Health grow its market share in Niagara County – where its current share of 26.1% trails Kaleida’s 34.3%.
Acknowledging “tremendous” headwinds, Catholic Health President and CEO Mark Sullivan said the system continues to reevaluate and reinvent itself. Catholic Health has reduced its workforce by 350 positions over the last five years, mostly from the administrative support services ranks.
Catholic Health also is in the midst of negotiating a new long-term agreement with Highmark Blue Cross Blue Shield of Western New York, looking for what Sullivan called “meaningful reimbursement rates” out of the region’s largest health plan that properly compensate the health system for the cost of patient care.
“It’ll be a long road,” Sullivan said. “I think you’ll see from our reports, when we disclose our financials and any reports we have from the creditors, that they believe in our strategy. It’s just that without significant investments by the payers or by the state or by the federal government, it’s a long road ahead. And health care is one of the most critical services, especially in a community like Western New York.”
Want to know more? Three stories to catch you up:
• Why Catholic Health, despite its financial struggles, is confident Lockport Memorial Hospital can succeed
• Big financial losses lead to credit downgrade for Catholic Health. The recovery will take some time
• Catholic Health takes a different approach with new Lockport hospital
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1. The Buffalo Niagara economy usually recovers more slowly from recessions than the rest of the country, and the latest downturn is no different. The region has had the fourth-slowest recovery among the 100 major U.S. metro areas.
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The Buffalo Next team gives you the big picture on the region’s economic revitalization. Want to talk health care? Have a tip? Reach out to Jon Harris at jharris@buffnews.com or 716-849-3482.
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