Dive Brief:

• Fitch Ratings lowered its outlook for Lifespan to negative from stable, citing the Rhode Island-based healthcare system’s “notably” weaker operating results through the third quarter, in the latest sign of financial distress facing hospitals.
• Elevated labor costs, reduced patient volumes due to staffing shortages and closed beds and inflationary pressure on non-labor expenses contributed to Lifespan’s operating loss in the nine months ended June 30, the credit rating agency said Friday.
• Fitch said it affirmed Lifespan’s BBB+ issuer default rating, as well as the BBB+ rating on the Rhode Island revenue refunding bonds issued on behalf of Lifespan, due to the hospital system’s still-sound liquidity position and leading market position, and a detailed recovery plan that is expected to support improvement in operations.

Dive Insight:

The rating downgrade comes seven months after Lifespan and Care New England, Rhode Island’s two biggest health systems, called off merger plans after the Federal Trade Commission and the state’s attorney general sued to block the deal.

The FTC, which has challenged several hospital deals this year, alleged the combination in Rhode Island would have increased prices and diminished the quality of care, with the two systems controlling 70% of the state’s inpatient services.

Fitch said the merger could have created synergies and an opportunity to rationalize some services but also had the potential to dilute Lifespan’s operating and financial profile. Lifespan holds a 57% market share in Rhode Island, twice that of Care New England.

Going forward, Lifespan’s rating stability will depend on how well management can execute its operating recovery plan in fiscal 2023, Fitch said. The strategy includes targeted cost reductions, revenue cycle transformation and other initiatives. Management is very focused on reducing losses, but staffing shortages and significantly higher operating expenses are expected to persist, the ratings agency said.

Another downgrade is possible if operating EBITDA margins do not stabilize at 5% or better, the agency warned. Ratings also could be pressured if liquidity declines further and cash-to-adjusted debt levels weaken materially, Fitch said.

Lifespan’s board is conducting a national search for a permanent CEO after Timothy Babineau stepped down from the helm in May. Arthur Sampson, who has spent 35 years with Lifespan hospitals, was named to the CEO post in the interim.

Lifespan is hardly alone in its struggle to stem deteriorating margins. Hospitals are projected to post billions of dollars in losses this year, driven by rapidly rising costs, especially for labor, according to a report out last week from Kaufman Hall. The American Hospital Association recently cautioned that worsening financial conditions could put more rural hospitals out of business, leaving patients with fewer options for quality care near home.