Jefferson debt upgraded on strong performance, despite low profit margin

Standard & Poor's has given its blessing to Thomas Jefferson University's rapid expansion under chief executive Stephen K. Klasko, upgrading the Center City institution's debt by one notch, to A+.

"The upgrade reflects TJU's increasingly diversified presence and material market-share growth," S&P said, citing Jefferson's mergers with Abington Health in May 2015 and Aria Health in July, as well as pending deals with Kennedy Health in South Jersey and Philadelphia University.

In addition, Jefferson paid $67 million in June to gain a controlling stake in the Rothman Orthopedic Specialty Hospital, immediately adding to its earnings. Jefferson had previously owned at least 15 percent of the Bensalem hospital.

Jefferson employed nearly 20,000 on a full-time equivalent basis and had more than 3,000 physicians in its system on Sept. 30, S&P said. Jefferson had 25,446 admissions in the three months ended Sept. 30, compared to 30,014 for the University of Pennsylvania Health System, the region's largest.

S&P, the New York bond-rating agency, said measures of Jefferson's debt relative to its assets were generally better than or in line with other health systems with an A+ rating.

In particular, Jefferson's $2 billion in unrestricted reserves - thanks in no small part to the inclusion  of more than $700 million from the Abington Health Foundation - gives the tax-exempt system financial flexibility.

However, Jefferson's operating margins are relatively weak, and worsened in fiscal 2016 with the addition of Aria, according to the S&P report this month.

In the year ended June 30, Jefferson's operating margin, including Aria on a pro forma basis, was 1.54 percent, compared to an average of 4.1 percent for A+ rated health systems in 2015, S&P said.

Based on its fiscal 2016 audited financial statement, which does not include Aria, Jefferson's operating profit margin was 3 percent. That ranked fifth among 10 area systems, not including the Children's Hospital of Philadelphia, which had the region's leading operating margin of nearly 10 percent.

Penn's operating margin of 7.3 percent  topped the list for systems that focus on adults.

Most Philadelphia-area tax-exempt systems had margins that fell short of the 5 percent to 6 percent considered necessary for an organization to have enough money for needed investments to improve services. Operating income excludes certain kinds of investment income and other results not directly connected to running the business.

But only one area system had an operating loss in fiscal 2016. That was Lourdes Health System, which is based in Camden and had an overall loss of $4.56 million on $550 million in revenue.

Lourdes' chief executive Alexander J. Hatala said that the system's two hospitals were profitable and that losses in physician practices caused the small overall deficit.

"However, we have confidence that our strategic investments in cardiovascular services, neurosciences, and population health strategy will enable us to continue to grow in the future," Hatala said in an email.

Lourdes is part of Trinity Health, a massive Michigan-based Catholic system that also owns Mercy Health System of Southeastern Pennsylvania and St. Mary Medical Center in Langhorne. Mercy and St. Mary were profitable, though St. Mary had a significant decline in its operating margin, to 4.8 percent from 7.5 percent.

Temple and Einstein, two systems anchored in poverty-stricken North Philadelphia, had notable upticks. Einstein's small operating profit was its first since 2012. Temple's operating profit was its second in a row after a string of annual operating losses back to 2007.

At Jefferson, efforts are underway to trim costs through "system integration initiatives," with savings expect to climb to $100 million a year by 2019, compared to an anticipated $25 million in the current fiscal year, S&P said.

"Integration is part of it, but not the only source of margin improvement," Peter L. DeAngelis Jr., Jefferson's chief financial officer and chief administrative officer said in an email. "Growth is also anticipated in various service lines."

DeAngelis, whose career includes CFO roles at the former Catholic Health East and at the University of Pennsylvania Health System, said Jefferson is "not planning significant job reductions at this time, although given the demands in health care for value-based care, we cannot guarantee there may not be reductions in the future."