ProMedica Loses $70M in 2018 After ManorCare Skilled Nursing Acquisition

Non-profit hospital operator ProMedica announced its first set of annual financial data after acquiring skilled nursing giant HCR ManorCare last year, and the early results weren’t positive.

The Toledo, Ohio-based firm reported $70 million in losses for fiscal 2018, according to an unaudited financial report for bondholders, despite a major revenue gain from absorbing approximately 400 skilled nursing facilities and other care locations from ManorCare.

Becker’s Hospital Review first reported the financial filing.

That $70 million loss for 2018 came on about $4.9 billion in total revenues, a $1.8 billion rise from the year before — $1.3 billion of which came from ManorCare’s 170 skilled nursing facilities, 55 assisted living properties, and 120 home health and hospice entities in just five months on the books for the year. But that gain came with a rise in expenses.

“Total operating expenses increased by $1.7 billion, with nearly $1.3 billion related to acquisitions of HCR ManorCare and a rural hospital,” ProMedica reported. “Provider expenses increased $53 million related to higher staffing costs, including contracted labor.”

For comparison, ProMedica saw $134.5 million in profit in 2017.

The ManorCare deal also substantially boosted ProMedica’s debt levels, which rose from $990 million in December 2017 to $2.37 billion at the end of last year. That shift increased the company’s total debt-to-capitalization ratio from 28.6% to 50.1%, and lowered the cash-to-debt ratio from 1.9 to 0.6.

Choppy post-merger waters

ProMedica finalized its HCR ManorCare pickup last July in a novel joint venture structure with major real estate investment trust (REIT) Welltower Inc. (NYSE: WELL). Under the terms of the approximately $4.4 billion deal, Welltower and ProMedica formed a 80-20 partnership to buy the real estate associated with HCR ManorCare’s operations from former REIT owner Quality Care Properties; ProMedica separately purchased the operations piece outright.

At the time, leaders at the REIT and the hospital operator praised the transaction as a revolutionary health system integration play, with ProMedica moving to control the delivery of services from the acute setting all the way to the home. In an era where a hospital’s reimbursements increasingly depend on the quality of care residents receive post-discharge, complete oversight of the spectrum could hypothetically lead to stronger financial health for operators and better outcomes for residents.

“I believe ProMedica and Welltower will together make this real estate more consequential as sites of care,” Welltower CEO Tom DeRosa told SNN in April 2018. “I believe that ProMedica sees this real estate beyond the basic function of the skilled nursing facility. This will allow this major health system to deliver its care model in effective, well-located, lower-cost real estate than an acute care hospital.”

Welltower executives continue to be upbeat about the deal, with chief investment officer Shankh Mitra on Monday reporting that the integration process remains on track and projecting that future cash flows could be greater than anticipated at the time of the acquisition.

But ProMedica has weathered credit downgrades from Standard & Poor’s and Moody’s, both of which pointed to the company’s increased debt loads and the murky outlook for the post-acute industry.

“HCR ManorCare provides post-acute care services — an industry that has experienced significant operating pressures, particularly about reimbursement and occupancy, in recent years,” S&P wrote in announcing ProMedica’s fall from A+ to BBB; over at Moody’s, ProMedica’s standing dropped from A1 to Baa1.

DeRosa shrugged off the rating changes on the company’s third quarter 2018 earnings call back in October, despite the fact that he and other executives had pointed to ProMedica’s A-level credit ratings when announcing the deal.

“We said investment-grade … We expected that they could be downgraded to triple-B plus,” DeRosa said at the time.

Full steam ahead

ProMedica emphasized in its financial release that the company only recorded five months’ worth of revenues related to ManorCare, with post-acute care representing only 28% of the company’s total haul. That number will increase to about 50% as the integration process reaches its completion, according to the non-profit.

The company also in January restructured its leadership team, shrinking the size of its overall board and cutting the number of standing committees, while also implementing subsidiary-level boards.

“These changes allow for all ProMedica boards to better support the newly expanded organization and work in a more efficient and effective manner,” the company noted in the financial release.