UMass Memorial Reacts To Credit Downgrade

UMass Memorial Healthcare's chief financial officer reacted Tuesday to the recent credit downgrade Moody's Investors Service issued due to mounting cost pressures for the Worcester-based health care system.

On March 7, UMass Memorial's outlook was downgraded from "positive" to "stable."

CFO Todd Keating said a stable outlook is "accurate," as the hospital's revenue has declined due to lowered payments from both public and private payers as a result of cost-control measures.

To combat cost pressures, Keating said the hospital has been working on pension reform with all bargaining units, which includes ongoing negotiations with the Massachusetts Nurses Association.

"We cannot, in this environment, continue to support the benefit structure that was in the (previous contract)," Keating said.

UMass Memorial has also worked to lower costs by selling its home health and hospice business and a lab business in recent months, Keating noted.

"All of these significant changes have to do with the factors outlined in that report," Keating said of Moody's rating action report.

Moody’s cited a number of budget “challenges” the hospital faces in the report, including:

Weakening operating performance over multiple years due to declining inpatient volumes, higher-than-budgeted expenses, and a thin operating cash-flow margin of 5.2 percent in fiscal 2012;

A large pension liability of $878.7 million in fiscal 2012, which was underfunded by $337 million; and

A large union employee base, which limits the flexibility of the system’s cost structure.

UMass Memorial’s comprehensive debt totaled $950.6 million in fiscal 2012, according to Moody’s.

Despite steps UMass Memorial is taking to relieve cost pressures, a bump back up to a positive outloook is not likely in the near future.

The report summarized Umass Memorial’s outlook, saying “the revision of the outlook from stable to positive reflects ongoing pressure on operating performance and thin operating cash flow. Although management is taking many steps to contain expenses and liabilities (including pension), improve revenue cycle and grow liquidity, the likelihood of a rating upgrade in the next two years is unlikely given ongoing credit challenges…”

UMass Memorial still maintains a number of financial strengths, according to Moody’s, including:

A strong market position with with a large operating revenue base of $2.2 billion in fiscal 2012;
A close working relationship with the University of Massachusetts Medical School; and
A manageable amount of direct debt, given the system’s large size.