Adventist Health CFO John Beaman explains how he separates strategy from financial ratings.
A credit downgrade can significantly impact a hospital’s financial health and operational viability. For healthcare CFOs, navigating this turbulent terrain requires strategic foresight and proactive management.
So far this year, 19 health systems have received downgrades from Fitch Ratings or Moody's Investor Service in 2024. The challenges leading to these downgrades vary and range from increased debt and revenue loss, to declining volumes and labor expenses.
Adventist Health’s downgrade (from “A” to “BBB+”) was primarily driven by a big leverage increase that the system is taking on, partially to support the acquisition of two hospitals from Dallas-based Tenet Healthcare.
HealthLeaders spoke with Adventist Health CFO John Beaman about what it means for a hospital to receive a downgrade.
“I want to reinforce the importance of rating agencies. I do find my interactions with them valuable when we talk to them at least every year,” Beaman said. “[But] they have a good objective view of the entire industry.”
CFOs should strive to not villainize rating agencies but welcome their objective view of the organization.
“[A rating] may or may not be the complete story of the journey,” says Beaman. “so a downgrade could be on the path to a long term sustainable position that leads back to a higher grade over time. I don't see the downgrades, per se, as a testament of the long term, sometimes they definitely are, but not always.”
Sometimes, Beaman says, it’s okay to intentionally go for a new strategy or operation even though it may result in a downgrade. Long-term stability should be the key piece of the puzzle.
“I separate strategy from the ratings because there are times where a system may make an intentional decision,” he says, adding that while the decision may result in a downgrade, it may be stronger for it in the future.
Beaman sees these ratings an “objective look at the current position.” He also believes CFOs must find the balance of realizing that the rating indicates the journey the system is on, and being confident in where they are steering the system to be in the next three to five years.
Come Back with A Plan
While a credit downgrade may not be the end of the world, it still requires a focused strategy to get back on track. There are a number of items that can result in a downgrade, such as a diminished financial or enterprise profile, staffing challenges, rising operational costs, fewer admissions, and management turnover.
To regain stability and avoid future downgrades, CFOs need to have a clear picture of their financial performance. Ensure there are clear financial metrics in place, as well as monitoring for performance against best practice benchmarks.
CFOs should also look for performance gaps are in their organization so they have a clear understanding of where the core issues lie. Consider assessments from third parties to point out complicated challenges. These assessments can also show improvement opportunities for the organization, and from there CFOs can create a detailed plan to tackle each issue.
Lastly, don’t forget to leverage technology. Many CFOs, including some HealthLeaders Exchange members, have expressed how implementing automation within their revenue cycle has helped significantly. Don’t overestimate a challenge, the solution could be simpler than initially expected.
Marie DeFreitas is the CFO editor for HealthLeaders.
KEY TAKEAWAYS
Over a dozen hospitals and health systems have received financial downgrades in 2024.
A financial downgrade could be a great opportunity to implement change.
CFOs can look at several opportunities to identify underlying challenges and avoid future downgrades.