Minnesota-based Fairview Health Services lost its A-level rating from Moody’s Investors Service and could fall further on the credit scale as it copes with worsening operating struggles that began before the COVID-19 pandemic.
Moody’s lowered the rating Wednesday to Baa1 from A3 and assigned a negative outlook. Further downgrades raises the risk that Fairview — which has a merger in the works with the higher rated South Dakota-based Sanford Healthcare — will breach rating triggers in bank agreements, Moody’s said.
The system has $1.6 billion of debt.
The downgrade reflects the “expectation that weak operating performance, which began prior to the pandemic but worsened in 2022, will be difficult to reverse, especially in light of heightened labor costs and soft inpatient volume trends,” Moody’s said. “Other headwinds, including inflation and annual transfers to the University of Minnesota, will also constrain margins.”
Labor struggles, especially on the nursing front, have hit the not-for-profit hospital sector hard and for Fairview and other Minnesota hospitals the pain has been acute, with nurses striking last September and again in December over wages and conditions.
“The negative outlook reflects protracted pre-pandemic operating challenges, further exacerbated by higher-than-expected labor expenses,” Moody’s said. “If Fairview is not able to maintain forecasted cash metrics, albeit at lower levels, or if operating performance does not exceed forecasts, the rating could be downgraded further. This would raise the risk of breaching rating triggers in bank agreements.”
The downgrade doesn’t factor in a proposed merger with Sanford or the prospect of an infusion of funds from the now expected return of University of Minnesota health system facilities to the university.
“One or both of these transactions, if finalized, would result in meaningful changes to Fairview’s overall profile,” Moody’s said. Fairview currently provides $80 million annually to the university as part of the affiliation.
Fairview operates the University of Minnesota Medical Center under an affiliation agreement established in 1997, which Moody’s said gives Fairview a competitive boost in the region.
Fairview operates 10 hospitals in the Twin Cities metropolitan area, which extends into northern Minnesota and western Wisconsin, with $6.4 billion of operating revenue in fiscal 2021.
Fairview and Sanford signed a non-binding letter of intent to merge and create a single integrated system in November with hopes of closing the transaction early this year.
Last week, the university said it intends to purchase the East Bank campus it sold to Fairview in 1997 along with other facilities that it did not previously own but are part of the university health system, like Masonic Children’s Hospital.
University officials plan to seek state financial help to take ownership of the facilities and upgrade them with the request also expected to include funding for a new facility.
The merger has seen pushback over the impact on some services, existing contracts, and the university system during public meetings held by Minnesota Attorney General Keith Ellison, who must sign off on it, as would federal anti-trust regulators.
The two systems entered into talks to merge in 2013 but ran up against public and political pushback. Minnesota’s attorney general at the time, Lori Swanson, along with some state lawmakers and others, raised concerns over an out-of-state system taking control of the university medical center and the two ultimately canceled talks.
This time they are attempting to highlight the independence that Fairview would retain and the return of the university medical center would smooth the path.
The systems would each retain their regional presence, leadership and regional boards in the markets they serve. The name of the parent company would become Sanford Health and Sanford chief executive officer Bill Gassen would take the helm as president and CEO with Fairview Health Services CEO James Hereford in the role of co-CEO for one year post-closing.
The not-for-profit hospital landscape has also shifted dramatically from a decade ago. Various forms of consolidation are being pursued as a strategy to leverage scale and improve operations that benefit balance sheets as hospitals recover from the COVID-19 pandemic while struggling with an ensuing nursing shortage and supply and inflationary cost pressures that dragged margins back down to negative territory last year.
“As a combined system, we can do more to expand access to complex and highly specialized care, utilize innovative technology and provide a broader range of virtual services, unlock greater research capabilities and transform the care delivery experience,” officials said in the announcement.
Sanford is the largest rural health system in the United States and is headquartered in Sioux Falls with 47 medical centers, more than 200 Good Samaritan Society senior care locations, and world clinics in eight countries.
The systems have not disclosed plans for their municipal bond debt.
In addition to the Moody’s rating, S&P Global Ratings rates Fairview A with a stable outlook after a 2021 downgrade due to operating losses.
Sanford has about $1.6 billion of debt and operating revenues of $6.7 billion in 2020. Fitch Ratings raised its rating to AA-minus and stable from A-plus in March 2021. S&P rates Sanford A-plus and stable.