Merged Excela, Butler health system is struggling financially, CEO says

Economic storm clouds are on the horizon for the newly combined Excela and Butler health systems, and a “significant expense reduction plan” is in the near future, according to an internal letter signed by President and CEO Ken DeFurio.

In the letter — sent to employees and medical staff at the Greensburg- and Butler-based health systems and acquired by the Tribune-Review — DeFurio cited ongoing financial pressures from the pandemic, staff shortages, inflation, cost increases, declines in reimbursement rates and the stock market as reasons for future cost-cutting measures.

DeFurio, who had led Butler Health, became the new organization’s leader in January,

“November, December and January were difficult months, and we anticipate similar numbers for February,” DeFurio said in the letter. “We must substantially reduce our operational costs.”

For the six-month period ending Dec. 31, Butler Health System reported an operating loss of more than $23 million, according to a continuing disclosure report.

At Excela, the same six months in 2022 saw an operating loss of more than $15 million.

Plans to stabilize

Senior executive team members within the company are “working with their direct reports” on the cost-saving plan, and the entire health system is being scrutinized, DeFurio said in the letter. He did not elaborate on what the plan might entail.

“Butler Health System and Excela Health were both fully aware of the financial challenges that we faced separately and together as we studied and completed the merger,” he said. “These challenges were a compelling reason for the organizations to become one.”

He added that other health systems nationwide and in Western Pennsylvania are facing similar challenges, and the health system “cannot respond simply by increasing our prices” because of the way Medicare, Medicaid and health insurance contracts function.

“What hasn’t changed is that these challenges are precisely why our respective boards came to the conclusion that we are stronger as a single system,” DeFurio said. “We will make necessary changes and use this scale to our advantage.”

‘Negative’ rating watch issued

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

Fitch revised the rating on $79 million worth of revenue bonds. The bonds were issued by the Butler County Hospital Authority.

Fitch’s analysis noted that financial results for Butler Health System through Dec. 31 suggest it has persisting operating challenges, “exacerbated by inflationary pressures on labor and supplies, but also patient volumes, which have yet to rebound to pre-pandemic levels.”

“The ratings agency’s report is a straightforward review of the situation and is reflective of the challenges all providers are facing in today’s health care economics,” said Tom Chakurda, spokesperson for Excela Health, on behalf of the combined health system. “We are confident we are addressing the matter in a prudent and productive manner for the sustained benefit of our new organization.”

The health system declined to comment further on the letter.

Assessing financial health

Karl Propst, director at Fitch Ratings, said the change to a “negative” rating is related to the breach of Butler’s debt service contract.

“They have to maintain a certain level of cash flow relative to their maximum annual debt service coverage,” Propst said. “When you have covenants in place, they are typically to signal, ‘alright, we need to have a conversation, because not everything is going as you expected it to go.’ That is what the case is here.”

Debt service coverage ratios are metrics that can be used to assess a company’s financial health in terms of ability to cover debt service obligations, including principal, interest and lease payments.

Evaluating credit

Rahul Telang, professor of information systems at Carnegie Mellon University, explained that a credit rating for a business is similar to a credit score for a person, in that it indicates creditworthiness.

“There are multiple factors, so no one factor determines a, b or c,” Telang said. “A higher credit rating means you will be able to get a loan at a lower interest. If the rating goes down, you will have difficulty raising money.”

“Broadly, it basically means that a loan breach happened and now some action can be taken by the lender, and the action can be in many forms,” he added. “All that means that Butler Health System will have some negative repercussions in the form of whatever is indicated in the covenant and however the market perceives (Butler Health System) to be.”