Joseph Krist

Publisher

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ISSUE OF THE WEEK

$340,935,000

ILLINOIS FINANCE AUTHORITY

REVENUE REFUNDING BONDS

(OSF HEALTHCARE SYSTEM)

Moody’s: A2   S&P: A

This credit comes to market with a negative credit outlook. Moody’s is concerned that OSF would not be able to achieve and sustain stronger margins that would be sufficient to offset high leverage for the rating category. Moody’s believes ongoing capital investments would likely impede deleveraging over the coming years.

OSF Healthcare System operates thirteen acute care hospitals and a large multi-specialty physician group. Twelve of the system’s hospitals are located in Illinois; OSF also owns a small critical access hospital in the Upper Peninsula of Michigan. The System’s largest hospital, OSF Saint Francis Medical Center in Peoria, Illinois, is a 629-licensed bed tertiary care teaching hospital. OSF’s newest hospitals, a 174 bed facility in Danville and a 210 bed facility in Urbana, were acquired from Presence Health in February 2018.

The acquisition of the Presence Health facilities is a bit of a double edged sword. The acquisition will add some scale and potential upside opportunity, but will also hinder deleveraging and expose OSF to a market dominated by the Carle Foundation. The system is expected to maintain overall good volume trends, and a solid, albeit more moderate level of investments.  Some of the risk is offset by  its leading market positions in several markets including its key Peoria market.

The issue will refund long term debt issued in 2007 and 2009 and will bond out shorter term debt issued to initially fund the acquisition of the Presence facilities.

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ANOTHER MAJOR HEALTHCARE COMBINATION

Henry Ford Health System and Wayne State University  have signed a letter of intent to affiliate. The potential deal would unite two of the major providers in the greater Detroit metropolitan area. The affiliation would designate Henry Ford Hospital in Detroit as the primary institutional affiliate for Wayne State University’s School of Medicine, College of Nursing and Eugene Applebaum College of Pharmacy and Health Sciences.

The agreement would create the health sciences center to be a separate operating and governance structure with a president, board, budget and governing committees.” It would oversee management and financial coordination of the partnership’s clinical, research and educational programs and activities. The affiliation under discussion is not a merger or acquisition. Both Wayne State and Henry Ford would continue to work with other contracted partners, including DMC.

For Wayne State, the deal offers a way to reduce its relationship with DMC which has become more fraught in recent years. This has been especially true since DMC went under the ownership of Tenet Healthcare Corp. It had become clear that the public and for profit relationship was mutually agreed to be a poor fit. Now there is an opportunity for Wayne to partner with a not for profit academic medical center which is hoped to result in a much lower level of cultural friction between two institutions.

For Henry Ford, the partnership would expand its opportunities for participation in research. The plan would create a $341 million-plus research enterprise that would rank 74th-largest in the nation.

AND AN UPDATE ON ANOTHER

The Massachusetts Health Policy Commission (HPC) has rendered a preliminary opinion as to the potential impact of the proposed merger between Beth Israel Deaconess Medical Center and Lahey Health. After the transaction, BILH’s market share would nearly equal that of Partners HealthCare System, market concentration would increase substantially, and BILH would have significantly enhanced bargaining leverage with commercial payers. BILH’s enhanced bargaining leverage would enable it to substantially increase commercial prices that could increase total health care spending by an estimated $128.4 million to $170.8 million annually for inpatient, outpatient, and adult primary care services. Additional spending impacts would be likely for other services; for example, spending for specialty physician services could increase by an additional $29.8 million to $59.7 million annually if the parties obtain similar price increases for these services. These would be in addition to the price increases the parties would have otherwise received. These figures are likely to be conservative.

The parties could obtain these projected price increases, significantly increasing health care spending, while remaining lower-priced than Partners. Plans to shift care to BILH from other providers and to lower-cost settings within the BILH system would generally be cost-reducing and proposed care delivery programs may also result in savings, but there is no reasonable scenario in which such savings would offset spending increases if BILH obtains the projected price increases.

Achieving all of the parties’ care redirection goals could save approximately $8.7 million to $13.6 million annually at current price levels, or $5.3 million to $9.8 million annually with projected price increases. The scope of care delivery savings is uncertain; however, the parties have estimated that their care delivery plans will save an additional $52 million to $87 million. The parties have stated that BILH would achieve internal savings and new revenue that would allow them to invest in these plans and enable BILH to be financially successful without significant price increases. Nonetheless, to date, the parties have declined to offer any commitments to limit future price increases.

NEW JERSEY BENEFIT AGREEMENT

New Jersey has announced that a deal has been struck between the governor’s office and the state’s public-sector unions representing local, state and county employees; college professors; and school employees. It is estimated that the plan will save nearly half a billion dollars on health care costs over the next two years. Savings will include $274 million in cost reductions for public employees and retirees in the coming health care year, which starts Jan. 1. The state will also save $222 million in the 2020 calendar year by adopting Medicare Advantage for retirees of both the state health benefits program (SHBP) and the school employees health benefit plans plan (SEHBP).

In the 2019 fiscal year, the state expects to save $37 million in the SHBP by adopting a number of formula changes adopted in 2016, which have to do with the use of generic medication and out-of-network reforms. The deal is designed to reflect the provisions of Chapter 78, enacted in 2011 to establish a framework for addressing New Jersey’s unfunded pension position liabilities. Chapter 78 requires public employees and retirees to field a larger share of their health care premiums, which is phased in during a multiyear period and depends on the participant’s income level.

The new health plans are to cover more than 800,000 current and retired state and local government employees — nearly 1 in 10 New Jerseyans. Health care premiums for the state’s teachers are expected to decrease 1% next year, after a 13% increase this year, while prescription co-pays will decrease even more according to the Governor’s office. The savings will be achieved by pushing Medicare-eligible retirees from preferred-provider plans to Medicare Advantage, and by making it more costly for employees and retirees to use out-of-network specialists and brand-name prescriptions. Employees and retirees will have no co-pays for in-network doctors and $3 co-pays for generic prescription drugs. The state is spending $15,680 this year on health care for the average employee and $12,988 for the average retiree, according to figures from the state treasurer’s office. Private-sector employers in New Jersey spend an average of $4,747 per employee for health insurance, according to the Kaiser Family Foundation.

ANOTHER CONVENTION FINANCING

They have a checkered past and, like stadiums, evoke different views of their impact on local economies and finances. So it is interesting to see that Sacramento’s City Council approved spending up to $328 million to renovate the city-owned Sacramento Convention Center and Community Center Theater. The theater has been the subject of litigation over the issue of disabled access.

The mayor says that the city’s investment in the renovations will generate at least $22 million annually back into the city. The construction and the expanded venues will also create 2,800 jobs. There is no real way to evaluate the claim. Likely many of the jobs in that total are construction jobs which are not long term contributors.

The debate is coming at a particular point in the economic and rate cycles. From the City’s standpoint, interest rates remain favorable (if rising) and the economy is at a level where the project looks viable. Whether those conditions remain is a risk for the project. Should the completion of the project coincide with a negative economic turn, the project will have a harder time generating performance metrics consistent with debt service coverage requirements. a

BROADBAND P3 UNDER FIRE IN KENTUCKY

As the discussion continues about the viability and efficiency of public-private partnerships (P3), the news out of Kentucky regarding the commonwealth’s P3 for broadband development in the state’s rural areas is not good.  The program known as KentuckyWired is the subject of an audit by the Commonwealth chief auditor and the results are not good from either a financial or policy point of view.

The auditor’s report includes nine major findings: that the structure of KentuckyWired departs from usual public-private partnerships and the original design of the project; that important terms more favorable to Kentucky and its taxpayers were changed during procurement; that the role of private sector funding has been publicly overstated; that the public was directly misled about revenue streams that would help finance the project; that the project has encountered significant cost overruns; that Kentucky has proceeded with the project despite “unrealistic” contract terms regarding its execution; that KCNA, overseeing the project, has inadequate financial analysis and monitoring of costs; that an $88 million settlement with one of the contractors lacked sufficient analysis; and that Kentucky is relying on speculation about wholesale revenues.

Among the issues cited for criticism – the KentuckyWired project would net the state $1.3 billion in revenue. The auditor report contends that that figure is based on a highly “conceptual” model KCNA failed to verify, profits are subject to sharing with the Center for Rural Development, Inc., and even then, the model is based on constantly increasing wholesale prices that would be passed on to consumers.  The project management  admits to several shortcomings.

The state did indeed rely heavily on the expertise of private partners, including Macquarie Capital. One private vendor has refused to respond to requests for information about its role in producing erroneous maps which caused the vendor to attempt to negotiate easements for properties not in the project’s right of way. This despite the fact that the Commonwealth has a contractual right to audit the project via the Finance and Administration Cabinet, and exercising that contractual right is how the Auditor of Public Accounts came to perform this Special Examination.

The situation highlights many of the issues which P3 opponents raise in their opposition to these arrangements. They include the knowledge gap between municipal entities and private vendors in terms of both project execution and negotiations of terms. The public rightly questions the terms of P3s generally when they see deals such as this one generating the problems it has. The resulting lack of support stymies efforts by the Trump Administration and its congressional supporters to support an increased role for private interests in the provision of public goods.

SEATTLE SPORTS

Washington state’s King County Council has approved $135 million in public funding for improvements at Safeco Field where the Seattle Mariners have played for the last 19 seasons. The team had originally asked for $180 million in funding to fix wear and tear at Safeco in association with a 25-year extension with the Public Facilities District that oversees the ballpark.

The funding comes as the Seattle City Council unanimously approved a $700-million arena renovation project that will take place at the site of the current KeyArena, and if all goes according to plan, the building should be ready for NHL action in October 2020. Opposition came from housing advocates who seek increased public resources to address Seattle’s increasing housing affordability crisis.

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