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How Good Shepherd Health System Jumped Four Moody's Ratings

Analysis  |  By Jack O'Brien  
   April 23, 2018

CFO Michael Cheek discusses how joining CHRISTUS Health System improved the system's cash flow, liquidity, and operational outlook. 

Good Shepherd Health System (GSHS), which operates two acute care hospitals, trauma centers, a joint venture home health agency, as well as other ancillary medical services, saw its Moody's ratings improve by four levels.

Moody’s raised the Longview, Texas–based system’s rating from Caa1, the highest Caa level, to Ba3, the lowest Ba level. If an organization is rated Caa, Moody's rates a system to be of "poor standing and subject to very high credit risk," whereas those in Ba "have speculative elements and are subject to substantial credit risk."

GSHS suffered for years from declining patient volumes, rising costs, and severe operational challenges prior to joining CHRISTUS Health System, a Catholic nonprofit that oversees more than 60 hospitals and hundreds of medical facilities, in February 2017.

Improvement in the Moody's ratings were due in large part to CHRISTUS management, including a service line review regarding different services offered by GSHS as well as strategies to improve cash flow and liquidity.

In FY 2017, GSHS had $42 million on hand, due to "significant losses and turnaround costs." By the end of 2017, GSHS improved to $45 million on hand, though it still had low liquidity relative to debt at 32% cash-to-debt. During the first quarter of 2018, GSHS also reported an operating cash flow of $18.8 million, compared to the $8 million operating cash flow loss in FY 2017. 

RCM changes to recapture payment

Michael Cheek, chief financial officer at GSHS, told HealthLeaders Media that three strategies have aided the system's financial standing: rightsizing the system's cost structure, evaluating services for efficiency measures, as well as volume and rate analysis.

To address how the system was paid, GSHS overhauled its revenue cycle management (RCM) operations, reclaiming it from the company it had outsourced to for years.

Cheek said internal oversight along with assistance from CHRISTUS leadership helped GSHS reorganize its RCM, gain negotiating leverage with vendors and payers, and improve how the system charged for its services. 

Patient volumes picked up over the first half of 2017 due to both operational changes and marketing that highlighted the system's affiliation with CHRISTUS, according to Cheek. Despite a cost structure better suited for its expected patient volume and a heavy flu season, Moody's said GSHS' high self-pay population will continue to constrain revenue going forward.

Cheek said he is optimistic that the system's capital and debt operations are within its grasp after cash flow began to grow throughout last year. GSHS also has $20 million allotted for capital projects in FY 2018, with CHRISTUS covering the remaining funding.

Ratings improve, but challenges remain

Though GSHS may be removed from some of its past struggles, Moody's stated that the system's "absence of a longer and sustained track record of material cash flow improvement," will remain a credit challenge for the foreseeable future.

Cheek said the system is looking to add more providers to its network, but it is also battling a significant problem without a simple solution: demographic changes.

Cheek said out-migration from low-population areas like Longview to metropolitan centers such as Dallas or Austin is hampering efforts by smaller systems like GSHS to maintain patient volumes. Between 2009 and 2013, internal migration to other counties constituted 23% of migration in the state, according to the Texas Comptroller's office

Additionally, GSHS must navigate the competitive north Texas provider market, where larger health systems are growing both in size and profitability through mergers and acquisitions as well as expanding convenient care sites.

Cheek said GSHS remains committed to reviewing its portfolio of medical facilities, ensuring the system can provide “the right services in the right locations.” Cementing its real estate holdings remains part of GSHS' strategy to keep patients closer to home for treatment while also focusing on opportunities to expand services and capture additional market share.  

Process and partnership paying off

Two years ago, GSHS sought a partner to help address the financial and operational issues facing the system. Initially, GSHS secured a deal with Duke LifePoint Health, but that ultimately fell through in late 2016.

Reflecting on the first year with CHRISTUS, Cheek advised systems facing a similar situation to choose a partner with the best match of organizational culture. GSHS has adopted the faith-based CHRISTUS culture, which Cheek said is consistent with the historical roots of the system's commitment to care for the community.

Cheek said GSHS is honored to have the support of CHRISTUS as a partner, leading employees to feel “proud and positive” about the organization's future prospects after one of the best years in "a long, long, time."

"I think this past year has been really uplifting and stabilizing, financially," Cheek said. "Layering in the CHRISTUS mission and values has gone a long way to bring the organization closer together, more aligned, and more integrated. [That's] not only here locally, but the other ministries that [CHRISTUS] has in the region and throughout Texas have been a big help."

Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.


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