S&P Lowers ProMedica Outlook, But Sees ManorCare Improvement Ahead

Standard and Poor’s lowered its outlook for non-profit health system ProMedica, but analysts see sunnier days ahead for its HCR ManorCare skilled nursing assets.

S&P Global Ratings on Christmas Eve affirmed its BBB long-term rating for ProMedica’s debt obligations, while also lowering its outlook on the Toledo, Ohio-based health giant from “stable” to “negative.”

Following in the footsteps of Moody’s, which in October downgraded its ProMedica rating from Baa1 to Baa3, S&P blamed the outlook revision on struggles at the non-profit’s Paramount-branded Medicaid plan.

“The outlook revision reflects ProMedica’s weaker financial performance in fiscal 2019 owing to Paramount’s state Medicaid product that led to a significant operating loss of $102.8 million for the interim period ended September 30, 2019; and what we view as weaker credit metrics for a ‘BBB’ rating, notably weaker debt and operating lease adjusted coverage below 1x,” S&P credit analyst Anne Cosgrove said in a statement announcing the change.

That said, S&P stopped short of knocking down the BBB rating any lower, with a specific focus on the ManorCare skilled nursing assets that ProMedica acquired in 2018 as part of a blockbuster deal with joint-venture partner Welltower Inc. (NYSE: WELL).

“However, we believe management is proactively addressing these challenges and has made some progress to date, including freezing the state Medicaid product to new entrants, receiving retroactive rate payments from the state, and looking to increase premium rates,” S&P’s Cosgrove, Suzie Desai, and Kenneth Gacka noted in the statement. “We believe this, along with improving performance at legacy HCR ManorCare and at the legacy ProMedica provider organization, precludes a lower rating at this time.”

Real estate investment trust (REIT) Welltower and ProMedica shook the skilled nursing world during the summer of 2018, when they teamed up to buy the struggling ManorCare chain out of bankruptcy; all three companies are based in Toledo.

Welltower picked up ManorCare’s real estate in an 80-20 joint venture with ProMedica, which assumed full control of the chain’s operations in an overall deal pegged at $4.4 billion.

The early post-merger waters have been choppy for the companies, with ProMedica losing its A-level ratings at Moody’s and S&P over the course of 2018, a year that saw ProMedica report losses of $70 million.

But the health system credited its relatively new network of more than 170 nursing homes for helping to offset its Medicaid plan losses last spring, noting that its ManorCare arm generated $18 million in operating income in the first quarter of 2019 — compared to a Paramount loss of $28.5 million.

Back in October, a ProMedica spokesperson asserted that the company’s fundamentals remained sturdy despite the stresses on its Medicaid business.

“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.”

S&P concluded its report by predicting that further outlook shifts or upgrades over the next two years are unlikely, while also cautioning that more downgrades could come if ProMedica doesn’t improve its cash flow and overall performance.

“The rating affirmation reflects the acute-care and post-acute care businesses meeting target, as well as our expectation that management has made progress in resolving the state Medicaid issues,” S&P noted. “This will be key to maintaining the rating given the weaker baseline financial profile.”