Credit rating agency says Butler Health System is backsliding further financially

Butler Health System’s credit rating was downgraded this week.

The system, which combined with Greensburg-based Excela Health at the beginning of the year to form Independence Health System, had its rating downgraded three notches from A to BBB on June 26. Excela and Butler Health are rated separately.

Fitch previously changed its rating watch of Butler Health System to “negative” in February after the health system reportedly breached a bank loan agreement with Truist Bank of North Carolina.

In a statement, the agency said the ratings downgrade reflects “deficit operating and excess losses.”

“This really reflects the operating challenges that Butler is continuing to have, much like the rest of the health care sector, largely driven by inflationary pressures, particularly on labor, that we have seen over the past couple of years, particularly post-covid.” said Karl Propst, director at Fitch Ratings.

“About 16% of our rated health care portfolio is in the triple B category, so the most common rating for hospitals and the hospital sector is in the A category,” he added, noting that a triple-B rating is still investment grade.

The rating signals to the market that Fitch recognizes Butler Health has operating challenges, and that “their general financial profile isn’t as strong as it once was,” according to Propst.

“The expectation is that they are entering into various initiatives for operational turnaround,” Propst said. “We don’t know what those look like yet, but we know they are looking at what options they have to improve operations. I don’t think that’s inconsistent with what we’re hearing elsewhere. Everybody is saying in this sector that labor pressures are a challenge, and that expenses are higher overall, and they’re trying to look for ways to be more efficient.”

Independence Health System spokesperson Tom Chakurda said the credit rating agency’s analysis is “straightforward.”

“Our focus remains steadfast on revenue, growth and efficiencies systemwide,” he said.

Future for the system

Butler Health System experienced significant financial losses of $33.1 million over the nine months ending March 31. Losses during the same period last year at the health system were only $1.2 million.

In the same time frames at Excela, losses went from $10.4 million to $29.3 million. Overall, the combined health system reported losses of more than $62 million over the nine-month period ending March 31.

Propst said the entire health sector is experiencing losses in the wake of the pandemic.

“We saw a drop-off in patient volume pretty much sector-wide, and we saw turnover in nursing staff,” he said. “As we sort of move beyond covid, we’ve seen a lot of pressure on labor. A lot of hospitals, including Butler, have had to use agency staff or traveling nurses to be able to fully staff their beds. We’ve seen patient volumes start to come back, but in many cases, they haven’t returned to what they were pre-covid.”

Looking ahead to the prospects of the merged Independence Health System, Propst said Fitch largely sees the merger as a positive, but can’t predict the future.

“We don’t fully know what this merger or formation of a new health system will look like,” he said. “We fully expect there to be benefits from merging in terms of contracting and negotiating for supplies, but we don’t fully know what that will look like yet.”