Mississippi Baptist Health Systems continued to post operating losses in 2016. The hospital system has suffered such losses four out of the last five years and Fitch revised its ratings outlook to negative last March. Baptist revenue has increased but the system still suffered a $3.9 million loss that was nearly double projections. However, that was an improvement over the previous two years that saw operating losses of $17 million and $29 million. Baptist is also hurt by some gambling on variable rate swaps on bonds as well.
Baptist provides quarterly and annual financial statements as part of its regulatory compliance for issuing bonds. The 2016 annual report is posted at the bottom of this post. The annual report states:
For FY 2015, the Health System had a $32.1 million increase in total revenue, increased non-capital expenses of $17.1 million and increased capital expenses of $2.7 million. During FY 2015, MBHS acquired two critical access hospitals, Baptist Medical Center-Yazoo (BMC-Yazoo) and Baptist Medical Center-Attala (BMC-Attala) and opened the Baptist Heart Clinic. The addition of the two critical access hospitals resulted in $11.4 million in additional total revenue and $14.2 million in operating expense for FY 2015. The remaining increase in operating revenues can be attributed to inpatient and outpatient volume growth and revenue cycle stabilization during FY 2015. Excluding the critical access hospitals, total noncapital and capital expenses increased by only $5.5 million due to labor control and contract management....
This table shows year-to-date operating loss of $3.9 million and operating EBIDA of $38.2 million. Net operating revenue grew by 10.4% over prior year, and over the budgeted growth by $2.7 million. Actual inpatient volume as compared to budgeted volume for the Medical Center was under budget by 167 admissions but ahead of prior year. Outpatient volume has been above budget expectations and above prior year. Actual non-capital operating expenses are above budgeted expectations and above prior year. Actual capital related expenses are below budgeted amounts. This resulted in an operating loss of $3.9 million for the August 2016 year-to-date financial performance as compared to a budgeted loss of $2.1 million. The non-operating gain is $5.2 million versus the budgeted gain of $7.7 million and the $4.5 million gain in the prior year. Included in this line item are year-to-date realized investment gains totaling $19.3 million, unrealized investment losses of $14 million, and a $9.8 million negative change in valuation of the fixed payer swap transaction entered into in March 2007...
Some highlights of the 2016 annual report are:
*Admissions increased from 20,264 patients in 2011 to 21,868 patients in 2016. Nice increase but it was 167 patients below projections (See Table 5 on page 7). ER visits at MBMC showed positive growth while the average daily census dropped seven patient per day in five years. However, the 2016 budget expected the daily census to be 302 patients instead of the actual 290 that was posted.
*Revenue increased from $368 million in 2011 to $526 million in 2016 and exceeded projections. However, expenses are hurting Baptist. Salaries and benefits increased over $100 million in five years- $216 million to $331 million. Baptist acquired two hospitals and opened a clinic so such increases are probably to be expected after such expansion.
*Baptist has posted an operating loss four out of the last five years:
2011: -$6.6 million
2012: $4.5 million
2013: -$22.7 million
2014: -$29.3 million
2015: -$17 million
2016: -$3.9 million
The budget expected losses to be $2 million in 2016. However, the actual losses were almost double projections. The budgeted amount is in parenthesis.
*Mix of payors:
Medicare: 54% (56%)
Medicaid: 8% (8%)
Blue Cross: 15% (14%)
HMO/PPO: 14% (13%)
Private insurance: 1.5% (2%)
No Insurance: 7.7% (7%)
*However, there is one blight on the balance sheets of Baptist: Swaps. Yup, Baptist gambled with bonds that carried variable rates in 2007. Note IX states:
On March 1, 2007 Mississippi Baptist Health Systems entered into a 67% of one-month LIBOR fixed payor swap with USBAG. The swap had a notational amount of $80 million (Series 2007B bonds) and is fixed at 3.759% for a term of thirty years.
As a result of the 2010 Fitch downgrade to “BBB+” by Fitch Ratings, earlier in 2013, UBS requested that Baptist post collateral on the value of the swap agreement, in accordance with our swap agreement executed with the Series 2007 debt issuance. On April 29, 2013, Baptist entered into a swap novation agreement with Deutsche Bank. The agreement calls for Deutsche Bank to post $5M of collateral at the “BBB” rating level, by Fitch ratings with a net interest cost of 6.25 bps on the $80M swap. As of August 31, 2016, the Health System has posted collateral of $27,033,239, an increase of $22.6 million from August 31, 2015.
As of August 31, 2016, the valuation of the swap was a $31.1 million liability, an increase of $9.8 million from August 31, 2015. This is reported on the balance sheet in other long-term liabilities.
The hospital system also issued another $80 million in variable rate bonds in 2009 as well. Variable rates bonds do not have a fixed interest rate that is amortized for the term of the bonds. Baptist essentially bet against the market with a variable rate. When the bond gods are kind to Baptist, the system makes more money from the bonds. However, the system loses money when interest rates go the wrong way.
*Baptist owes $12 million on bonds issued to finance the construction of the Madison site. The interest rate was fixed at 2%. However, the bonds were issued in 2006 and supposed to mature in 2012 but were refinanced. The original bonds had a variable interest rate.
However, Fitch had a few things to say about Baptist's finances when it revised the outlook for Baptist to negative (Keep in mind that this statement is based on 2015 results):
The revision of the Outlook to Negative is driven by MBHS's failure to stem the sizeable operating losses of the last three years. Recent losses are related to the difficulties with MBHS' current Paragon Electronic Health Record (EHR) installed in 2014, which has been a barrier to implementing certain efficiency initiatives. The acquisition of two critical access hospitals (CAHs) and other unbudgeted expenses also contributed to MBHS' suboptimal performance in 2015. While improved over prior year, MBHS' operating results failed to meet budget in fiscal 2015 (year-end Aug. 31) with a $23.4 million operating loss (negative 5.1% operating margin), and continue to trail budget at a negative 3.4% operating margin through the three-month 2016 interim period ended Nov.30 2015....
Fitch issued its press release on March 1, 2016. It rated the MBHS's bonds at BBB.
Kingfish note: Notice the date of the annual report: twelve months ending August 31, 2016. Baptist announced the next day it would collaborate with Baptist Health Systems in Memphis.