Downgraded bond rating points to University of Michigan Health System's budget problems
The University of Michigan Health System's complex set of budget problems has had an implication on its bond rating.
At the end of November, Moody’s Investors Services downgraded the University of Michigan Hospital’s bond rating to Aa3 and Aa3/VMIG 1 from Aa2 and Aa2/VMIG 1.
Funding the construction of the new C.S. Mott Children's Hospital has set the University of Michigan Health System back financially.
Angela J. Cesere | AnnArbor.com
The VMIG rating is for a short-term, variable rate demand obligations. The Health System still has the best quality VMIG rating, which is an evaluation of the degree of risk associated with scheduled principal and interest payments, as well as of the degree of risk associated with the demand feature.
Moody's reports the Health System is still stable financially with the new rating.
The bond rating also affects $281.4 million of outstanding hospital rated debt issued by the University of Michigan Regents, according to Moody’s.
Pete Barkey, director of communications for the University of Michigan Health System, gave this statement:
"Our Hospitals and Health Centers (HHC) continue to be recognized in the highest ratings categories available from Moody’s. Even with the new rating, we remain among the top 15% of the hundreds of hospitals and single state health care systems that have been rated. We have more than $1 billion cash on hand, and total assets topping $3 billion. We remain strongly positioned among other hospitals and health systems in the region. "While Moody’s HHC rating changed to Aa3, Standard & Poor’s reaffirmed our AA+ rating, taking into consideration our operating improvement plans. The HHC is not issuing any new debt, so our interest cost will not be affected by this downgrade. It will not impact the interest cost on existing debt, and we do not expect it to affect the interest cost on the new debt to be issued by the University. Therefore, we do not expect it to have an impact on future development. We remain firmly positioned among the strongest free standing hospitals and single state health care systems in the nation. And most importantly, we will continue to offer the highest level of patient care in the region and across the country."
The downgraded bond rating announcement came about a week before top administrators at the University of Michigan Health System sent out an internal email to all their employees, instructing them that additional departmental budget cuts would have to be made.
In November, the Health System asked all of its department heads to figure out how to cut costs.
Plans include attrition management, reduced appointments, reduced overtime, reduced temporary staff and contract labor, as well as "savings from improvements in supply chain efforts," according to the email.
As an explanation to what prompted the sending of the email, Barkey gave this statement:
“Like all hospitals and health systems, the challenge to remain financially strong is increasingly difficult with external changes in reimbursement and reduced research funding. Our expenses are currently exceeding our revenue, which challenges us to reduce expenses where possible. We have made great progress and will continue to look for ways to improve through the rest of this fiscal year and beyond.”
The downgrade in the bond rating is a result of a “marked decline in operating performance” in the 2012 fiscal year, which extended from July 1, 2011 to June 30, 2012, according to Moody’s.
The drop in cash on hand was due to the increased expenses of opening the new, $754 million C.S. Mott Children’s Hospital and Von Voigtlander Women’s Hospital in December 2011.
Additionally, Moody’s has reported the University of Michigan Health System has had to transfer funds to U-M’s Medical School to cover operating expenses.
The first quarter of the 2013 fiscal year, which began July 1, likely also had low operating cash flows because of the same pressures, Moody’s reported.
Katie Oppenheim is chairwoman of the University of Michigan Professional Nurse Council, which represents nearly 5,000 registered nurses throughout UMHS.
Oppenheim said there have not been nurse layoffs in 2012, and that nurses have not experienced the implications of the Health System’s budget problems.
“I don’t see that there are going to be layoffs,” Oppenheim said. “We’re staffed appropriately.”
Oppenheim said there isn’t a great increase in the number of nurses retiring this year.
Dr. Ora Pescovitz, CEO of the U-M Health System, has alluded to the institution’s growing budgetary problems on previous occasions.
In her October “State of the Health System” address to her staff, Pescovitz announced to her staff the need for each one of them to identify and suggest ways to minimize expenses.
“Currently, like most health systems and academic medical centers across the country, our financial situation is challenged. What this means is that we have to take actions now that will improve our financial performance this fiscal year, as well as prepare us for future financial success,” she said. “But each one of us needs to identify and suggest ways that we can minimize expenses, increase efficiency and generate revenue in order to improve productivity.”
Speaking at a separate Medicare symposium in October, Pescovitz acknowledged her concerns with the fiscal cliff facing the federal government that could result in a $100 to $200 million annual budget gap for the health system.
The breadth of the gap is tied to the amount of National Institutes of Health funding UMHS receives. If Congress doesn’t act to avoid the full impact of the fiscal cliff UMHS is facing an eight to nine percent cut in its NIH funding.
Another challenge facing the Health System is the decline in Medicare reimbursements as a result of the Patient Protection and Affordable Care Act.
In order to move the Health System’s bond rating back up, there would have to be “marked improvement” in operating cash flow generation, according to Moody’s.
However, if weak revenue streams continue and the university’s credit strength deteriorates, the bond rating could be in jeopardy of being downgraded again.
“At the end of the day if we do not fulfill our margin, we will not be able to fulfill our mission,” Pescovitz said during the “State of the Health System” address.
Amy Biolchini covers Washtenaw County, health and environmental issues for AnnArbor.com. Reach her at (734) 623-2552, amybiolchini@annarbor.com or on Twitter.
Comments
transplant
Mon, Dec 17, 2012 : 10:52 p.m.
Let's see - top UM officials are making close to eight million dollars, UM is going to pay one and a half million dollars for the Blimpy Burger property, the football team made over 60 million, but the hospital needs money and is taking it from employees. Let's not forget that Ms. Pescovitz is making $739,000.00 too! Does anyone else see anything wrong with this picture?
Elena Chesney
Tue, Feb 12, 2013 : 7:57 p.m.
Look up Unit Based Budgeting- the UM is not all one big 'bucket' that all units pull from. The Athletics Department and Health System have entirely separate revenue streams and budgeting processes. It's decentralized.
blue85
Mon, Dec 17, 2012 : 4:44 p.m.
From Bloomberg: "The global bond market disagreed with Moody's Investors Service and Standard & Poor's more often than not this year when the companies told investors that governments were becoming safer or more risky. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg. That's worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody's rating and outlook changes and 50 percent of those by S&P." It appears both rating agencies are suffering from a credibility gap. What counts is how the market trades the bonds. If UM's rating declines and the system bonds trade at a wider spread, UM will be able to buy in the bonds for fewer dollars. As it is, if the market, on a coin toss, doesn't trust the ratings, then it may be that if there are future issuances, they might NOT be settled at a wider spread (higher interest rate cost). It will be interesting to watch this one play out.
Dagan Gales
Mon, Dec 17, 2012 : 8:52 a.m.
Maybe when they are handing all this money out at the begining of the year thinking they have plenty they should choose a little more wisely where and how much they hand out so come the end of the year when they have patients such as my wife heather gales 26 who has been in the hospital for almost 2 months and been diagnosed with a rare form of guillain barre which is a very rare syndrome to begin with they would have the extra money to actually help a family out finacially that deserves help an not just have to tell them your sorry but you can't help. When u of m hospital is made out to be this great place you can come an get all the help you need witb no problems.
snapshot
Mon, Dec 17, 2012 : 1:53 a.m.
So the nurses union said nothing as to how, or what they are willing to do to alleviate this financial burden.....,oh yeah, they just got done 'striking" for more money and benefits. Meanwhile these "public" employee costs are usustainable and unfunded and unions are contributing to the problem by refusing to make any significant concessions and continue to hold the public which they are supposed to serve "hostage" to their bullying and gang tactics. I want to hear not a canned response of "were adequately staffed (read we will oppose any layoiffs with fear mongering) or that no increase in retirements have taken place (read as no nurse will retire without a signifacant "buyout") I want Oppennheim to submit a plan to help dealing with increased effcientcy, productivity, patient care, and cost savings. Step up to the plate Oppennheim. "Currently, like most health systems and academic medical centers across the country, our financial situation is challenged. What this means is that we have to take actions now that will improve our financial performance this fiscal year, as well as prepare us for future financial success," she said. "But each one of us needs to identify and suggest ways that we can minimize expenses, increase efficiency and generate revenue in order to improve productivity." Katie Oppenheim is chairwoman of the University of Michigan Professional Nurse Council, which represents nearly 5,000 registered nurses throughout UMHS. Oppenheim said there have not been nurse layoffs in 2012, and that nurses have not experienced the implications of the Health System's budget problems. "I don't see that they're going to be layoffs," Oppenheim said. "We're staffed appropriately." Oppenheim said there isn't a great increase in the number of nurses retiring this year.
easy123
Mon, Dec 17, 2012 : 12:28 a.m.
Maybe some of the folks commenting were defending the UofM payscales can recommend course of action. How about a pay increase to the Uof M med administrators for a job well done!
Stephen Landes
Sun, Dec 16, 2012 : 11:25 p.m.
Go back to the article discussing salaries and bonuses for U of M executives and see what raises and bonuses were given to hospital executives. Now see if those figures comport with the performance of the UM Hospital System as measured by the bond rating agencies. Looks like it is time to "claw back" the financial rewards.
Stephen Landes
Sun, Dec 16, 2012 : 11:27 p.m.
From A2.com, Friday, 14 DEC 2012: U-M Health System executive officer Ora Pescovitz earns $753,806 in base pay and another $100,000 in deferred compensation. Her bonus can reach $150,000 per year. In 2011, she earned $855,000, roughly $116,000 more than her base pay then, FOIA documents show.
CynicA2
Sun, Dec 16, 2012 : 10:22 p.m.
The mayor can forget about his trains to nowhere, too.
CynicA2
Sun, Dec 16, 2012 : 10:17 p.m.
The bonds may be secure, for now, but guess what's going to happen to all those fabulous forecasts for additional job growth at the medical center going forward?! Bet those get pared WAYYYY back. Welcome to the latest bubble-in-the-making... humungous healthcare only a few can afford to access. If insurance companies are calling most of the shots in Obamacare, the high-priced spreads like UM may grace fewer slices of bread. We'll all end-up down at Doc-In-the-Box, in Wal-Mart. Just fabulous.
sultanofswing
Sun, Dec 16, 2012 : 10:07 p.m.
Follow the crumbs, bond downgrade, insider trading, Medicare penalty, "porn" case, budget cuts, benefit cuts , social media hire ..hmmmmm
Goober
Sun, Dec 16, 2012 : 9:27 p.m.
I think they need to pay the executives more money. I am sure this is the root cause of the budget woes.
arborarmy
Sun, Dec 16, 2012 : 7:29 p.m.
I sure hope all of the financial geniuses commenting on this article have sent their resumes in to the university evincing their willingness to be the UMHS's CEO or CFO.
easy123
Mon, Dec 17, 2012 : 12:30 a.m.
There are better candidates, but I guess you must have voted for the Dems who very competant - wink! wink!
Michigan Man
Sun, Dec 16, 2012 : 11:14 p.m.
AA - With you obviously running the U of M Hospitals finance group why would others be interested?
sultanofswing
Sun, Dec 16, 2012 : 10 p.m.
Sorry Arbor but there are those at UM now who would agree that these are very real problems. It's not individual officers but the entire management structure/atmosphere that needs a real review. I wish that were not so but it is. For example Seen any real detailed, overall plan for UMHS to react to what we know is a radical restructure of health care ?
arborarmy
Sun, Dec 16, 2012 : 8:21 p.m.
Not what I said at all. But nice effort to attribute to me something that is not remotely related to the words in front of you. My point: the commentariat here have no idea whatsoever what they are "talking" about. None whatsoever.
Basic Bob
Sun, Dec 16, 2012 : 8:13 p.m.
Your answer to everything - keep spending money you don't have, and blame rich people for it. Doesn't take a genius to see the problem with that. The rich people are in charge. All they need to do is slow down just a tad.
15crown00
Sun, Dec 16, 2012 : 5:49 p.m.
So the great Health Systems bottom line doesn't ad up.Imagine that.Just like businesses throughout the United States.And this is a business for profit regardless of what the P.R. flacks claim.
eagleman
Sun, Dec 16, 2012 : 10:38 p.m.
So? They use that profit to build better hospitals and develop better procedures. The anti-profit angle is nothing but the babbling of idiots.
JRW
Sun, Dec 16, 2012 : 5:36 p.m.
Well, not sure if any of this drop in bond rating is related to the Sid Gilman situation, but that certainly didn't help UMHS on any level. An article in today's NY Times describes the "parallel" life of Gilman as in inside trader. Here is the link to the article: http://www.nytimes.com/2012/12/16/business/sidney-gilmans-shift-led-to-insider-trading-case.html The UMHS needs to get its cost structure under control, and allow nurse practitioners to do some of the basic patient primary care and write prescriptions, though doctors don't want to let go of their cash cows....... The fee for service incentives also need to be changed so that doctors don't keep ordering test after test just to fatten their wallets. Their salary should be based on outcomes, not how many tests and procedures they do. Many issues for UMHS to deal with, including the nonstop buildings. Does this ever end?
Greg
Sun, Dec 16, 2012 : 5:21 p.m.
After decades of increasing executives and doctors pay many times over what the workers get, it is no wonder the bloat is finally having an effect. On top of that those who planned the hospitals constant expansion should be held accountable. The business schools most of these people go to talk "grow or die", they completely forget uncontrolled growth is called cancer and can kill a person or an organization.
eagleman
Sun, Dec 16, 2012 : 10:37 p.m.
THis is a remarkably stupid comment. Firstly, there are not that many doctors and executives. Secondly, doctors are at the top of the medical pyramid. Without doctors, diseases cannot be treated and operations cannot be conducted. Knowing this, it then makes sense that they are paid substantially more than nurses or techs as it is doctors who are the main determinants on whether a patient lives or dies. Nurses are hugely important, but not as much as doctors. You also forget that doctors do not receive health insurance from UMHS. Doctors have bills nurses do not. One could cut all the executives pay to zero and UMHS would still haves serious financial problems. Your class warfare rhetoric holds no water.
Joe Kidd
Sun, Dec 16, 2012 : 5:17 p.m.
How about Mr. Barkey's comment that follows the typical "We never do anything wrong" mantra of the UM. I would like to see figures on travel by executives and physicians. How much are they spending to go to exotic locales? Invited or self initiated? Sure they will claim its to spread the word of the glory of the UMMC, but their job is here.
JRW
Sun, Dec 16, 2012 : 5:38 p.m.
UMHS does plenty of things wrong and right. However, with close to 200,000 deaths nationally due to medical errors, UMHS is responsible for a certain % of those. Why don't we know how many?
SonnyDog09
Sun, Dec 16, 2012 : 5:16 p.m.
So, which UM exec gets their performance review dinged for this bond rating downgrade?
uabchris
Mon, Dec 17, 2012 : 2:18 a.m.
Exactly!!!!!
jpud
Sun, Dec 16, 2012 : 5:59 p.m.
He's gone.
Rick Stevens
Sun, Dec 16, 2012 : 4:28 p.m.
What's the credit rating for annarbor.com I wonder?
LXIX
Sun, Dec 16, 2012 : 5:15 p.m.
Don't even ask It's impeccable. Google had to open a separate office downtown just to handle all of the site's advertising.
cibachrome
Sun, Dec 16, 2012 : 4:28 p.m.
If they had a Social Director, they could put a better Tweet on this. Maybe it should be a Vice President position. Bonus level, of course...
justcurious
Sun, Dec 16, 2012 : 4:02 p.m.
Follow the money.
Widow Wadman
Mon, Dec 17, 2012 : 1:07 a.m.
New building keep going up. Also, the Pfizer property and its buildings were purchased. All of these buildings need to be maintained, heated, etc. I wonder about those costs and how they affect the bottom lines of the Health System and the University.
Nicholas Urfe
Sun, Dec 16, 2012 : 3:12 p.m.
Let's review the executive bonuses. Have they decreased due to this poor performance?
julieswhimsies
Sun, Dec 16, 2012 : 5:14 p.m.
Yeah. Let's.
RUKiddingMe
Sun, Dec 16, 2012 : 2:59 p.m.
I assume this will have no effect whatsoever on their incessant building, expanding, etc. In my few self-led tours of the hospital facilities at UM and St. Joe's, I see a LOOOOOTTTTT of enormous unused space staffed by several lounging employees. The waste in the healthcare system is astronomical.
15crown00
Sun, Dec 16, 2012 : 5:53 p.m.
oh no not a bit.they don't know what STOP means
RUKiddingMe
Sun, Dec 16, 2012 : 5:49 p.m.
Well, David, I can only speak of the times I've had occassion to see people at work at various spots in the hospitals, but of those that I DID see, most of them appeared to be TAKING that much needed break you speak of. And when I see staff lounging, I would say that's more an issue of the management not making sure people are busy; I've given up expecting all employees to have a good work ethic. And I don't blame the luxurious and wasted expansions and remodeling on the troops.
David Paris
Sun, Dec 16, 2012 : 5:22 p.m.
Are you kidding me, indeed! A LOOO..., enormous, astronomical. The waste is definitely not on the side of the employees. Employees everywhere need a break, in more ways than one!
julieswhimsies
Sun, Dec 16, 2012 : 5:14 p.m.
The University of Michigan Health Care System's answer to everything is to construct and remodel at the expense of patient care. This Fall I became extremely ill, and went to Chelsea Hospital (Where I knew I wouldn't have to wait a gazillion hours to see a doctor.) As it turned out, the docs at Chelsea suspected a rare illness, and wanted to transfer me to the U of M. They couldn't do that, because the U of M told them they currently had 40 some patients waiting to be seen in the hallways at the ER. I ended up at St. Joe's, where the specialists I needed were not there. So much for the re-modeled, new and improved U of M ER.
Michigan Man
Sun, Dec 16, 2012 : 1:59 p.m.
More Obamacare low lights!
LXIX
Sun, Dec 16, 2012 : 5:06 p.m.
The canadian geese bring them in before hanging out at the golf club. I haven't seen any shortage of geese yet.
Basic Bob
Sun, Dec 16, 2012 : 2:51 p.m.
Maybe they will now slow down the reckless expansion of the hospital even as the population dwindles. It's great to have a brand new Children's Hospital, but where will the children come from?
GoNavy
Sun, Dec 16, 2012 : 1:32 p.m.
The poor management that we have to pay a pretty penny for is now going to cost the University Health System additional hundreds of thousands of dollars in increased interest costs.
blue85
Mon, Dec 17, 2012 : 3:19 a.m.
You say: "additional hundreds of thousands of dollars in increased interest costs." But the article clearly says: "The HHC is not issuing any new debt, so our interest cost will not be affected by this downgrade. It will not impact the interest cost on existing debt, and we do not expect it to affect the interest cost on the new debt to be issued by the University. Therefore, we do not expect it to have an impact on future development. " You should actually READ the article before embarrassing yourself.
15crown00
Sun, Dec 16, 2012 : 5:52 p.m.
this is a problem in almost every business.executives who siphon off the top are the scourge of business.
Basic Bob
Sun, Dec 16, 2012 : 2:54 p.m.
Which is really not a problem. They don't lose money, ever. It all gets passed along to the patients, their insurance, or the government. However, if they quit enlarging the hospital, they could save millions in interest.
smokeblwr
Sun, Dec 16, 2012 : 12:06 p.m.
Maybe they can start charging the patients a seating license in the wait room?
15crown00
Sun, Dec 16, 2012 : 5:50 p.m.
put Brandon in charge.He would do that.
annarboral
Sun, Dec 16, 2012 : 2:51 p.m.
Maybe the hospital should hire Dave Brandon to run the marketing for the hospital. Those who stay (in the hospital) will pay for it big time.
Brad
Sun, Dec 16, 2012 : 1:53 p.m.
If they tell you the amount and force you to pay, it isn't a "donation". It's a seat "protection" racket.
LXIX
Sun, Dec 16, 2012 : 12:57 p.m.
At the University seat fees are called "donations".
LXIX
Sun, Dec 16, 2012 : 11:57 a.m.
"Dr. Ora Pescovitz, CEO of the U-M Health System, has alluded to the institution's growing budgetary problems on previous occasions. " Must have been discovered after her pay raise.
Joe Kidd
Sun, Dec 16, 2012 : 5:21 p.m.
Exactly. If I were in her position and I had to send an email like she did, the first thing I would list is the cuts made by executive staff including myself. Unfortunately the cuts are typically made at the bottom of the pay scales, the very people who are front and center in delivering services. Who sees the execs on a regular basis?