Temple University Health System gets a big credit-rating upgrade from Fitch

In a sign of its continuing financial improvement, Temple University Health System on Wednesday received a two-notch upgrade into investment-grade status after spending the last eight years in junk-bond territory.

The Fitch Ratings agency cited an influx of $305 million in cash from the sale of Temple’s 50% stake in Health Partners Plans Inc. and two years of improved profitability at the North Philadelphia safety net system. Its anchor, the 576-bed Temple University Hospital, is effectively the city’s public hospital.

The new rating — ‘BBB,’ up from ‘BB+’ — means that Temple should face lower borrowing costs in the future.

Thanks to its increased financial strength, Temple, which had operating income of $95 million on $2.4 billion in revenue in its most recent fiscal year, has significant projects planned, Fitch said.

Temple previously announced the conversion of the former Cancer Treatment Centers of America hospital building in the Juniata Park section of Philadelphia into a women’s specialty hospital at a total cost of about $42 million, including the $12 million it paid for the property in June.

“The ability to relocate obstetrics to the Juniata Park campus will relieve the perennial capacity issues” at Temple University Hospital, allowing for more of the sickest patients to be treated, Fitch said.

Fitch said that Temple also plans to spend $70 million on an outpatient building near the main hospital and $50 million on a modernization of Fox Chase Cancer Center. Those projects are slated for 2023 to 2025. Temple provided no additional information about where the new building will go.

A large number of Temple’s patients at its anchor hospital have Medicaid insurance, which pays significantly less than the employer-sponsored plans that are more common at most of Temple’s competitors. So Temple receives special support from Pennsylvania’s government, totaling $222 million in the year ended June 30, 2021, and $213 million in fiscal 2020, Fitch said.

Temple’s health system employs close to 10,000 people on a full-time-equivalent basis.

Even before incorporating the $305 million from the sale of Health Partners Plans, a nonprofit Medicaid and Medicare insurer, to Thomas Jefferson University on Nov. 1, Temple’s financial condition had been improving steadily under a turnaround effort that started in 2018.

The sale of Fox Chase and Jeanes was under consideration. Jefferson agreed to purchase Fox Chase, but backed out of the deal because of the pandemic’s hobbling of most health systems’ financials.

Temple has had a heavy load of COVID-19 patients, but benefited from its ability to isolate them during the peak of the pandemic in a separate building form the main hospital. Unlike many health systems, Temple remained profitable during the pandemic.

Mike Young, who started at Temple as chief operating office of Temple University Hospital in August 2018, took over as CEO of the entire system in February 2020. Young has focused on getting all of the system’s facilities — including Episcopal, Jeanes and Fox Chase — to work together more seamlessly, with an emphasis on what is better for the system as a whole rather than for individual components.

For example, the main hospital, Jeanes, and Episcopal each used to have its own labs for blood work and other tests. Now there’s one larger lab at the main hospital where a robotic line can perform tests more efficiently, Young said in a September 2020 interview.