Moody’s Again Downgrades ProMedica, Citing Dropping Medicare Census and Slower ManorCare Upside

Moody’s this week downgraded its rating for non-profit health system ProMedica, citing concerns over the ongoing integration of the HCR ManorCare assets into its umbrella and weakening Medicare census at its nursing facilities.

The New York City-based rating agency dropped ProMedica from Baa1 to Baa3, with a negative outlook, the second such slip since the system acquired HCR ManorCare in a blockbuster deal that closed in July 2018.

“The post-acute care operation projects margins below initial projections in part because of declining Medicare census at nursing homes, which make up about two-thirds of post-acute revenue,” Moody’s wrote in its downgrade notice. “Expected synergies from the 2018 acquisition of HCR ManorCare will be slower than expected.”

Moody’s noted some turnaround potential for ProMedica’s in-house insurance arm, which suffered heavy losses during the first quarter of this year; the ManorCare assets, which ProMedica blamed for $70 million in red ink back in 2018, actually served to offset the insurance woes early on in 2019.

A spokesperson for ProMedica highlighted the insurance issues in a statement provided to SNN, calling the downgrade “primarily the result” of problems at its Paramount managed Medicaid plan.

“We are continuing to work collaboratively with the Ohio Department of Medicaid, and we are confident we will find an acceptable resolution that will allow us to serve this population in a financially viable manner,” the spokesperson said in a statement. “In the meantime, ProMedica continues to have a strong balance sheet, with approximately $1.5 billion in cash to support its financial stability. We are confident about our future and our ability to strengthen ProMedica’s financial standing.”

Moody’s remained pessimistic about ProMedica’s reliance on Medicaid residents.

“The downgrade is due to ProMedica’s very weak year-to-date fiscal 2019 performance and expected material shortfalls in cash flow and liquidity over the next three years compared with prior expectations, even assuming a large turnaround in the insurance operation,” Moody’s observed this week.

The Toledo, Ohio-based ProMedica endured a round of downgrades in the immediate wake of the $4.4 billion mega-deal, which saw the health group acquire the operations of HCR ManorCare from bankruptcy — while also forming a joint venture with real estate investment trust (REIT) Welltower Inc. (NYSE: WELL) to purchase the associated real estate.

At the time, Standard & Poor’s cut its rating for ProMedica from A+ to BBB in 2018, while the Moody’s outlook fell from A1 to Baa3.

Welltower CEO Tom DeRosa earlier this month described the finances of the ProMedica-ManorCare integration as “on track.”

“The integration is multi-leveled and going quite well,” DeRosa told the National Investment Center for Seniors Housing & Care in an interview. “One of the things we’ve seen is that ProMedica has done a very good job of assessing the talent pools at both ProMedica and HCR ManorCare and has chosen the best people to run respective functions.”