Moody’s sees trou­ble for THR since swift ac­qui­si­tion

Modern Healthcare - - Front Page - Ashok Sel­vam and Me­lanie Evans

Moody’s sees grow­ing pains for Texas Health Re­sources

When Texas Health Re­sources an­nounced in De­cem­ber the pur­chase of Med­i­cal Edge Health Group, of­fi­cials said they weren’t sure how the ex­panded health sys­tem would fully fit its more than 400 new em­ploy­ees.

Eight months later, that in­te­gra­tion re­mains THR’s “pri­mary chal­lenge fac­ing man­age­ment,” said Moody’s In­vestors Ser­vice. The agency re­vised the sys­tem’s credit rat­ing from sta­ble to neg­a­tive.

But Moody’s fore­casts a rough fi­nan­cial road for the faith-based Ar­ling­ton, Texas-based sys­tem and its more than 3,500 staffed beds.

Part of the concern comes from THR’s $200 mil­lion of debt out­side the obli­gat­ing group, which Moody’s said in­cludes $20 mil­lion of guar­an­teed debt from the Med­i­cal Edge deal.

First-quar­ter losses in fis­cal 2010 through­out THR’s physi­cian chain have left a neg­a­tive im­pact on the bud­get, and poor per­for­mances at some of THR’s larger hos­pi­tals also weighed down the sys­tem, Moody’s said. There’s also a 1.4% im­prove­ment in op­er­a­tional cash flow in fis­cal 2010 to 12.6%.

There’s hope, Moody’s said, as THR’s op­er­at­ing mar­gins spiked by 1.3% to 5.9% in fis­cal 2010. That shows man­age­ment’s abil­ity to im­prove per­for­mance while cop­ing with the strug­gles of fis­cal 2008, Moody’s said.

THR an­nounced the $176.4 mil­lion deal to ac­quire Med­i­cal Edge in De­cem­ber, and the trans­ac­tion in­cluded $34.7 mil­lion in li­a­bil­i­ties, ac­cord­ing to the health sys­tem’s fi­nan­cials. The deal also came with the ac­qui­si­tion of PhyServe Physi­cian Ser­vices, the physi­cian of­fice man­age­ment com­pany that sup­ported Med­i­cal Edge, the largest-in­de­pen­dent physi­cian prac­tice in the Dal­las-Fort Worth Metro­plex. THR in Jan­uary later sold PhyServe to Texas-based Med Syn­er­gies.

Dou­glas Hawthorne, Texas Health’s CEO, de­scribed the deal as a strate­gic and longterm in­vest­ment that added more than 250 physi­cians to its Texas Health Physi­cian Group, which pre­vi­ously em­ployed 236 doc­tors. Such growth “at one swoop” would other­wise have re­quired mul­ti­ple deals over mul­ti­ple years, he said. The rapid ex­pan­sion bet­ter po­si­tions THR for changes to re­im­burse­ment that pro­mote preven­tive and pri­mary care, such as ac­count­able care, he added.

THR moved swiftly to ac­quire the prac­tice af­ter talk last sum­mer that Med­i­cal Edge physi­cians would con­sider a deal, Hawthorne said, as Texas Health rushed to beat com­pet­ing of­fers that could have emerged. Half of Med­i­cal Edge’s doc­tors had no pro­fes­sional re­la­tion­ship with THR. The sys­tem now ex­pects to see new rev­enue as those physi­cians re­fer pa­tients to spe­cial­ists in­side the sys­tem, he said.

Dr. Cliff Deveny, se­nior vice pres­i­dent of physi­cian prac­tice man­age­ment for En­gle­wood, Colo.-based Catholic Health Ini­tia­tives, said it takes two to five years for a health sys­tem to fully in­te­grate a re­cently ac­quired physi­cian prac­tice. Fac­tors that slow the tran­si­tion in­clude al­low­ing a doc­tors group to re­main on an old com­puter sys­tem, rather than mov­ing the group to the health sys­tem’s tech­nol­ogy setup.

Many health sys­tems lack what Deveny pegged as the dis­ci­pline to ad­here to a busi­ness plan. They fail to take into ac­count the costs of in­te­gra­tion, which in­clude en­sur­ing IT and code com­pli­ance. But the big­gest chal­lenge these deals face is how the new prac­tice fits into the health sys­tem’s plans, Deveny said. The loom­ing ques­tion is will the prac­tice con­tinue to op­er­ate as it has with few changes, or will the health sys­tem fully ab­sorb it?

“There re­ally has to be an un­der­stand­ing of each other’s cul­ture,” he said.

Now mid­way through a fi­nan­cial plan­ning up­date, THR is search­ing for ways to curb its ex­penses to off­set the physi­cian ac­qui­si­tion and main­tain its credit rat­ing, said Ron­ald Long, THR’s ex­ec­u­tive vice pres­i­dent of re­source de­vel­op­ment and de­ploy­ment and chief fi­nan­cial of­fi­cer. That means cop­ing with in­creased op­er­a­tional ex­penses, in­clud­ing a full year of rental ex­penses from Med­i­cal Edge, which Moody’s pointed out. The re­port did not break out those ex­penses.

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