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The Dose - JK Wall

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Health Care & Life Sciences / Life Science & Biotech

Once debt-laden, IU Health’s finances in tip-top shape

January 11, 2016

When CEO Dan Evans relinquishes the reins of Indiana University Health in April, he will hand his successor Dennis Murphy a hospital system with a pristine balance sheet.

That’s a big change for IU Health, which when the Great Recession hit was debt-laden and cash-strapped.

Fitch Ratings acknowledged the transformation Friday when it awarded IU Health a AA rating on its bonds—which is Fitch's second-highest category.

The ratings upgrade was prompted by IU Health’s plan to market $263.4 million in bonds this month and next, which the hospital system wants to use to refinance older debt.

Fitch’s assessment: It’s a good bet.

“Operating profitability has significantly strengthened due to IU Health’s continued consolidation, integration, labor productivity, revenue cycle and other expense management initiatives,” wrote Fitch analyst Adam Kates, in a Jan. 8 report. He also noted that the Indiana hospital assessment fee program, instituted in 2011 and renewed in 2014, as well as the expansion of health insurance coverage via Obamacare and the Healthy Indiana Plan, have helped IU Health’s finances.

Starting in 1997 with just three hospitals in downtown Indianapolis—Methodist, University and Riley Hospital for Children—IU Health grew to have 19 hospitals with the 2008 opening of the Simon Cancer Center and the 2011 opening of the IU Health Saxony hospital.

But IU Health paid for a lot of its construction and acquisitions via debt, Kates noted. The hospital system's long-term debt as a percentage of its total capitalization (defined as long-term debt plus unrestricted assets) was 51.6 percent in 2008. But since IU Health stopped acquiring or building new hospitals in the past five years, and has worked to trim its annual expenses by $1 billion, its debt burden has “significantly moderated,” Kates wrote.

Now IU Health’s debt, which totals $1.68 billion, is equal to just 24.7 percent of IU Health’s capitalization. And Kates said IU Health is now in position to spend more than $1 billion to build a new hospital in Bloomington and to build significant new facilities in order to fold its University Hospital into its Methodist hospital campus.

Kates has been told by IU Health leaders that the Bloomington project, as well the transfer of women’s services from Methodist to Riley Hospital for Children, will be completed by 2018.

But the University-Methodist consolidation could take longer than originally stated—possibly as late as 2024, Kates wrote. When IU Health officials originally announced the consolidation, they said it would be completed by 2022.

At the same time, IU Health has far more cash on hand than it once did. They key measure for hospitals is “days cash on hand”—which means how many days could the hospital system pay cash to keep operating even without any new revenue.

IU Health’s finances appeared to be headed south in 2013, as Indiana patients suddenly slowed their use of health care services. That prompted IU Health and two of its peers to each lay off about 900 employees.

But by mid-2014, the Obamacare expansion and improving employment brought patients surging back. IU Health's operating revenue rose to $5.7 billion that year.

The combination of expense cuts and revenue growth has significantly padded IU Health’s cash cushion.

At the end of 2010, IU Health had just 153 days cash on hand. But now, it has nearly twice as much—291 days cash on hand. That means IU Health has $3.95 billion in cash and investments.

IU Health’s business appears to be slowing again. Through the first nine months of 2015, inpatient hospitalizations slowed to a halt, growing by just 19 visits in the third quarter, compared with the same period a year ago. That’s out of nearly 98,000 hospital visits statewide in the quarter.

But Kates expects IU Health to keep doing well due to strong market share and growing revenues from its insurance arm, IU Health Plans. According to Fitch’s data, IU Health claims 25 percent of all inpatient admissions in Indianapolis and the eight counties surrounding it, compared with 23 percent share for Community Health Network, 20 percent for St. Vincent Health and 10 percent for Franciscan St. Francis Health.

“The integrated delivery system, with a health plan, should position IU Health well for health care reform and population health managed related initiatives,” Kates wrote.

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