Oregon hospital system retains negative outlook from Fitch

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Medford, Oregon-based hospital nonprofit Asante Health had its A-plus rating, with negative outlook, affirmed by Fitch Ratings at year-end as it works toward completion of a new building at its flagship hospital.

Fitch said in a report Tuesday that it maintained the negative outlook, first assigned in January, because “Asante continues to record weakened operational performance that’s expected to continue through fiscal 2024.”

The system had $545.6 million in long-term debt, comprised mainly of the series 2020A and 2020B revenue bonds of $534.5 million, most taken on for expansion projects, as of the end of fiscal year 2022, according to its audited financial statement for year-end 2021 and 2022.

A rendering of the $455 million pavilion on the Asante Rogue Regional Medical Center campus in Medford, Oregon, expected to be completed in February.

Asante Health

Though Asante’s debt is to pay for expansion projects nearing completion, much of the system’s headwinds are similar to that faced by the rest of the sector.

Despite a modest positive turning point in 2023 for some U.S. not-for-profit hospitals, 2024 will again be categorized as another ‘make or break’ year for a sizeable portion of the sector, Fitch Ratings said in its annual outlook report published Dec. 5.

Not-for-profit hospitals are mired in an ongoing “labor-demic” with significant staff shortages, intense wage pressure and heightened inflation, according to Fitch. Out of these ongoing struggles has emerged a ‘trifurcation’ of credit quality that will only become more prominent in 2024, according to the rating agency.

“Much of a hospital’s ability to be successful will depend on their ability to recruit and retain staff in the currently hyper-competitive landscape for personnel,” said Fitch Senior Director and sector head Kevin Holloran.

Bond covenant breaches will be another area of concern heading into 2024.

“Second year violations, which would occur in calendar 2024 as fiscal 2023 audits are finalized, may intensify the potential for bondholders to declare an event of default and accelerate payment of bonds,” Holloran said.

Asante has three hospitals — Asante Rogue Regional Medical Center, Asante Ashland Community Hospital, and Asante Three Rivers Medical Center — and 36 community-based clinics. It operates in a nine-county region in southern Oregon and northern California.

It expects to complete in early 2024 a 323,595-square foot Pavilion building for expanded inpatient, outpatient and critical care services on the north side of its flagship Asante Rogue Regional Medical Center campus in Medford.

The new building would connect to an existing six-floor patient tower. The bonds also funded an expansion of the emergency department at Asante Three Rivers Medical Center and two regional cancer centers in Medford and Grants Pass, Oregon.

Both Fitch and S&P Global Ratings assigned negative outlooks to the healthcare system, initially in January for Fitch, and in August for S&P, citing weakened operations and balance sheet constraints.

Asante recorded a $33 million loss from operations for fiscal year 2023 ended Sept. 20 that equated to a 1.4% operating margin, based on EBITDA, earnings before interest, taxes, depreciation, and amortization, Fitch said. While Fitch noted that is a significant improvement from fiscal 2022’s $61 million loss from operations, analysts said Asante has limited financial flexibility at the current rating level.

“Operations are still challenged as management continues to implement its financial recovery plan,” Fitch analysts said. “Once completion risk for the sizable Pavilion project has been eliminated, and the system is able to demonstrate more successful implementation of its performance improvement goals, then a return to a stable outlook would be possible.”

Chief Executive Officer Tom Gessel and other Asante executives are “out of the office due to the holidays, and therefore unavailable to comment,” according to a spokeswoman.

Gessel was named CEO in June, and started as CEO Sept. 18, replacing Scott Kelly, who had retired in February. Additionally, long-time Chief Financial Officer Greg Wojtal retired in June 2022, and the prior vice president of finance assumed the position in November 2022, according to S&P’s August report.

On its affirmation of the A-plus rating, Fitch said it “believes the system will continue to generate sufficient operational cash flow to make its debt payments, fund routine capital investments, and generate moderate liquidity growth over the medium term.”

In fiscal 2023, Fitch said, Asante generated total operating revenues of roughly $1.2 billion, and it has a strong market share position of 78% in its primary service area.

A map of the Asante Rogue Regional Medical Center depicts where the new pavilion is located.

Asante Health

Fitch qualified the balance sheet constraints as moderate saying the constraints are consistent with inflationary pressures on labor and supplies, recent market volatility and post-pandemic operating challenges associated with capacity, throughput and average length of stay.

Asante also has no plans to issue debt during S&P’s two year ratings outlook period, analysts said when they assigned the negative outlook and affirmed an A-plus rating. The investment grade rating of A-plus is reflective of Asante’s “weaker operations coupled with a notable decline in unrestricted reserves and subsequently a more constrained balance sheet for the current rating,” S&P said.

“While operating margins have improved through the first eight months of fiscal 2023, ended May 31, we believe Asante has limited flexibility at the current rating level to manage further volatility in operations,” S&P said.

S&P also cited Asante’s enterprise strengths, including its dominant and essential position in the southern Oregon market, expanding outpatient presence, and a growing health network.

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