Butler Health System’s credit rating was further downgraded this week by rating agency Fitch.

The system, which combined with Greensburg-based Excela Health at the beginning of the year to form Independence Health System, Monday, Dec. 12, had its rating lowered one notch from BBB to BBB- with a Negative Outlook. Excela and Butler Health are rated separately despite being part of Independence Health System.

“The rating’s still investment grade, but I think it reflects maybe a more elevated level of risk than what we had previously indicated with our ratings,” said Karl Propst, director at Fitch Ratings.

Independence Health System has faced a slew of financial issues since its founding in January. Butler Health lost $43.3 million and Excela lost $36.2 million, for a total of more than $79 million in losses, for the fiscal year ending June 30. The system operated at a deficit of almost $23 million between the beginning of July and the end of September this year, according to recently released reports.

The health system has more than 1,000 physicians and advanced practice providers and employs 7,300 people

Independence CFO Tom Albanesi said in a statement the system is “disappointed with the development, but not surprised.”

“The rating remains investment grade,” he said. “We remain committed to our financial improvement plan and rating upgrades will follow.”

Meaning of the rating

In its statement, Fitch said that the one-notch downgrade and negative outlook reflect Butler Health System’s deepening operating deficit through fiscal year 2023 and a weaker-than-budgeted operating loss through the first quarter of fiscal year 2024.

The ratings agency highlighted that BHS has its debt service coverage ratio covenant with Truist Bank waived and is working on waiving the covenant with its bondholders. Covenants are put into bank and bondholder agreements in order to measure how well an entity is doing, and whether they have enough cash flow to cover their debt service.

In a bondholder meeting in early November, Independence leadership detailed a recovery plan the system put together alongside consultant FTI Consulting.

According to the plan, the system expects to stanch some of its financial bleeding in fiscal year 2024 and expects to see losses of about $23 million during that period — which is close to the amount the system reported losing in the most recent 3-month span.

“Fitch has little current visibility into how successful turnaround plans will be or to what extent Independence Health System, as Butler’s sole corporate member, will enhance BHS’s financial profile,” the report said about the improvement plan. “Should an event of default be declared and potential for debt acceleration, additional rating movement could be warranted.”

System challenges

Labor and inflation struggles are at the root of many of the health system’s problems, the report said, along with patient volumes that still lag behind pre-pandemic levels.

“(Butler Health System) continues to face operating challenges, including significant labor cost inflation. While operating margins historically were strong, results have deteriorated further through the (first quarter of) FY24,” the report said. “Management expects a still sizable operating loss for FY24.”

Propst said that this type of struggle is becoming more and more widespread for hospital systems like Independence since the start of covid.

“This is a lot more common over the past couple of years post pandemic, the type of stressed operations that we are seeing,” he said. “We are seeing it across the country. Part of that has to do with the fact that we are experiencing inflationary times, certainly with respect to labor cost pressures and the difficulty of retaining staff.”

He also cited lagging insurance reimbursement rates that haven’t kept up with inflation as taking a bite out of Independence’s finances. The system has identified its own frustrations with low insurance reimbursement rates, and plans to negotiate with payers.

Independence has cut 226 positions this year, and workforce management initiatives are expected to save the system $10.2 million in the upcoming fiscal year.

Despite the financial ups and downs, Propst says Excela and Butler have made themselves more resilient by merging.

“Certainly as a combined health system, I think they are stronger together than they were as individual hospitals,” he said.

• Independence Health sees about $23 million in losses over 3-month period

• Butler Health System losses nearly doubled in 2023

• Excela Health reports $36.2M loss for fiscal year ending June 30

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