With a credit downgrade from Moody's on Wednesday, the investment world is casting a wary eye on Roper St. Francis Healthcare's finances as margins continue to get squeezed.
Bret Johnson, the system's chief financial officer, said the one-notch downgrade on the debt still leaves Roper St. Francis in a strong position. It remains the only "investment-grade" health care system in Charleston and the surrounding counties, he said.
"You have to be financially very strong," he said, to qualify as investment-grade.
The new Moody's bond rating, Baa1, is associated with moderate credit risk. Neither of the other two major rating agencies, Fitch Ratings and Standard & Poor's, track the debt of Roper St. Francis.
Johnson said the lower rating from Moody's partly reflects difficult times for the health care industry across the state. He said the pressure Roper faces is similar to what hospital operators are grappling with everywhere.
Still, he said, Roper St. Francis can make a few improvements to better its standing among its lenders.
The system's operating cash flow margin, — a closely watched measurement of cash from business operations — has tightened over the years, crimping profits. Moody's warned in 2017 that Roper's debt rating could be downgraded if that metric did not improve. The rating agency then said that Roper's finances were "weaker than that of similarly rated peer organizations."
Specifically, analysts wrote, the system should increase its operating margin to at least 10 percent of annual revenue. Instead, it slipped a tenth of a point to 7.2 percent on revenue of $900 million last year.
A 2017 Moody's analysis noted nonprofit hospitals across the country struggle in the same way as expenses outstrip revenues.
"Tighter margins will weigh on the sector going forward," analyst Beth Wexler said in the report.
Johnson said Roper will need to become more efficient: High-priced medicines and expensive technologies pose a particular burden. Labor costs are climbing, too, as competition for skilled workers increases.
"Regardless of the environment we’re in, we have to work hard to maintain our margins,” he said.
Among other changes, Johnson said, Roper is pushing more work to an outpatient setting. And it's housing more of its physicians and staffers in office space that's owned by the system, he added.
The free or reduced-cost care that Roper St. Francis provides is not on the line. The system's spending on poor and uninsured patients is relatively higher than other nonprofit hospitals in the state.
The three hospitals under Roper St. Francis spend on average 7 percent of their expenses on charity care, according to tax filings. By comparison, the rest of the nonprofit hospitals in the state spent about 2 percent of their expenses on free or reduced price care.
The same analysis of tax returns showed Roper St. Francis pays its employees more on average than its nonprofit peers in South Carolina. Johnson said salaries and benefits are not up for re-consideration.
The system's upcoming opening of a hospital in Summerville could improve its performance, Moody's analysts wrote. The population in that area is rapidly growing, and Johnson said the new construction should pay off with profits on the long term.
Roper St. Francis announced in early 2016 it would build that hospital in Berkeley County and open it next year. The price tag is now $130 million.
Some of the other factors Moody's cited for the financial red flags — such as recent snowstorms and hurricanes, high-deductible insurance plans and a Medicaid policy change that reduces payments to hospitals — are not unique to Roper.
David Jacobson, a communications officer for Moody's, said in an email that high-deductible plans place more of the financial burden of medical services on patients. That, in turn, can increase the amount of "bad debt" hospitals need to write off.
"We've cited their growing popularity as a challenge," he said.
Roper St. Francis is one of the largest private-sector employers in the Charleston region, with about 5,400 workers on its payroll. It is managed by Charlotte-based Atrium Health, which also has 10 percent interest in the system. The Medical Society of South Carolina and Bon Secours Health System also hold interests in the system.