Ratingsservicedowngrades debt rating for Yale New Haven Health System

Jul. 18—Fitch's outlook for the bonds being paid off was rated as "stable."

Fitch's "AAA" ratings denotes the lowest expectation of default risk. The bonds in question are secured by a pledge of Yale New Haven Health System, which accounted for essentially 100 percent of the system's assets and revenues in fiscal 2022.

"This is not a huge downgrade," Eva Thein, a senior director and primary rating analyst with Fitch, said Monday.

The analysis report contained in the downgrade said the report "reflects the last three years of weakened operating performance, which has continued through the second quarter of the current fiscal year ended March 31, 2023."

"This is in combination with a decline in the system's liquidity position, while facing large capital needs, and slow recovery of volumes to pre-pandemic levels," the report said in part. "The stable outlook is based on Fitch's expectation that YNHHS will ultimately return to stronger operating results, albeit slightly lower than had been the historical level, in the outer years of Fitch's forward-looking scenario analysis."

"The Health System's credit rating remains strong at A+, with an improved outlook from 'negative' to 'stable'," a spokesperson from Yale New Haven Health wrote in an email to CT Insider. "We continue to focus on our mission and strategy while advancing operational improvement initiatives."

Angela Mattie, a professor of management and medical sciences at Quinnipiac University, said the increase in operating costs is hardly unique to Yale New Haven Health.

"It reflects what all hospitals are going through in relation to the pandemic," Mattie said. "It's a difficult time with regard to reimbursements. Frankly, given the environment, it's to be expected."

Finding enough workers for hospitals like Yale New Haven and its sister healthcare facilities during the pandemic drove up operating costs exponentially, she said.

"There was already a shortage of health workers to begin with and the pandemic only exacerbated that," Mattie said. "The bricks and mortar of acute care delivery systems needs attention. They had to build an entirely different infrastructure during the pandemic."

Fitch's stable outlook also reflect the rating company's view "that the system has sufficient available liquidity to carry out the large Neurosciences Tower project at the Saint Raphael campus of the Yale New Haven Hospital, even in the absence of anticipated additional philanthropy, which potentially could fund a significant portion of the project."

Construction of the Neuosciences Center at 659 George St. in New Haven got underway last year. The $838 million,505,000 square foot Neurosciences Center will cover over half a city block and take over four years to complete, creating about 400 construction jobs during peak work periods;

Once the final phase of construction is complete at the end of 2026, about 200 new health care and support jobs will be created, according to Yale New Haven Health officials. Fitch's analysis of the project said $169 million has been spent on the project thus far, with the largest spending projected between 2024 and 2026, with completion expected in 2027.

Yale New Haven Health is also in the midst of seeking state approval for a $400 million purchase of Prospect ECHN, which includes Waterbury, Manchester Memorial, and Rockville General hospitals, along with other affiliated medical offices and facilities in the north central area of the state.

The practical implications of the ratings down grade is that future borrowing by Yale New Haven Health System would result in higher payments by the organization, according to Demissew Ejara, an associate professor of economics, accounting, finance, and marketing at the University of New Haven,

"A downgrade usually increases the interest rate," said Ejara. "Even with a small downgrade, when there is a higher interest rate, a bond is deemed more risky in terms of repayment."

Thein said each lender does an assessment of its own that would be taken into account in terms of establishing an interest rate, if Yale New Haven Health Systems were looking to do initial borrowing.

Fitch's assessment of Yale New Haven Health System's outlook is that patient "volumes will strengthen over time based on YNHH's institutional characteristics, such as its local and regional market presence and brand recognition for tertiary and quaternary care, as well as management's detailed operational improvement plan addressing controllable expenses, inefficiencies related to length of stay and labor challenges." The ratings company expects that the system's "operating results for the 2023 fiscal year will remain weak, but financial recovery is expected starting with 2024 and beyond."

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Fitch's current rating does not take into account the ongoing efforts to acquire the three Connecticut hospitals from the California-based, for-profit Prospect Medical Holdings. That application is currently before state hospital regulators.

"The transaction is still facing a number of regulatory hurdles, but if successfully concluded, may involve some level of debt issuance," Fitch's debt ratings analysis said in part.

Fitch's analysis is that Yale New Haven Health System "has a strong reputation for high-end services, which draws patients to the system from a very large area beyond the state of Connecticut, including portions of New York and Rhode Island."

"In the system's wider Regional Service Area, which includes Connecticut's mid-region and portions of eastern New York and western Rhode Island, YNHHS maintains a stable 36.6 percent market share, compared to Hartford Health's 23.4 percent," the analysis said in part. "YNHHS has a somewhat concentrated payor mix with government payors at 67 percent of total gross revenues and Medicaid and self-pay at slightly over 25 percent. YNHHS's largest facility, Yale New Haven Hospital, operates in New Haven County, which has a slightly weaker demographic profile than Fairfield County, the location of Bridgeport Hospital and where Greenwich Hospital has outpatient presence."

The Fitch analysis said Greenwich Hospital "has particularly favorable demographics."