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Newly merged Butler Health System, Excela posts $62M loss

Excela reports $29.3M loss

The hard times continue for Butler Health System, which has sustained losses of $33.1 million over a nine-month period ending March 31, according to reports released earlier this week. The news comes mere months after its merger with Excela Health.

Over that same period, Excela lost $29.3 million, adding total losses for the combined system up to over $62 million.

The red ink forced Moody’s Credit Bureau to downgrade the health system’s credit rating from Baa2 to Baa3 on Tuesday, May 16.

“Like most health care provider organizations, Butler Health System and Excela Health are facing strong financial headwinds. These include patient volumes that have not returned to pre-COVID-19 levels, rising labor costs and a growing percentage of patients being insured by Medicare, whose reimbursements fall short of covering our costs,” said Tom Albanesi, Butler Health System CFO. “We continue significant and diligent efforts to eliminate our losses.

“We also continue to be transparent and cooperative with our banks, bondholders and rating agencies as we execute our financial turnaround initiatives. Initiatives that we are confident will have a most positive and material impact on the finances of our organization.”

The first fiscal red flag surfaced this February, when Butler Health System failed to meet its debt obligations with North Carolina-based Truist Bank. This led to not only a default, but a lowering of the system’s bond rating with Fitch Ratings to “negative.”

Moody’s report from earlier this month warned that it could happen again.

“Given negative operating cash flow, there is also increased risk that Butler may not be able to clear its MTI debt service coverage test come June 30, 2023, which would constitute an event of default and could trigger acceleration at the request of bondholders with at least 25% of aggregate principal debt,” according to Moody’s.

Even prior to the merger, both health systems had independently fallen on hard times. According to financial records, Butler Health sustained a loss of more than $23 million over the six-month period ending Dec. 31, 2022.

Excela, which still maintains separate financial results even after the merger, also lost $21.8 million over the fiscal year ending June 30, 2022.

Plans for the merger were announced in June 2022 and it was made official this January, creating one system of five hospitals across three counties. This included Butler Health’s two hospitals — Butler Memorial Hospital and Clarion Hospital — along with Excela’s three hospitals in Westmoreland County.

Less than two months later, in late February, the newly merged health system laid off 13 manager-level executives to reduce expenses. In a letter to employees shortly before the layoffs, Butler Health System CEO Ken DeFurio warned that there would have to be some serious cost-cutting in the next few months.

“Out of necessity, and to secure our long-term future and growth, we have embarked on a significant expense-reduction plan,” DeFurio said.

According to a University of Pittsburgh professor who specializes in health care financial management, the cost of integrating the operations from two different health systems into one may also have contributed to the losses, which have mounted exponentially in recent months.

“They’re trying to identify where to save money. They won’t go from unprofitable to profitable overnight,” said Kevin D. Broom, Ph.D. “So the turnaround will probably take a couple of years to be fully implemented before you really start seeing the major changes on the balance sheet.”

Butler Health System is far from alone in facing multimillion dollar losses during these times. Since March, at least 14 other hospital systems have had their credit or bond ratings downgraded by a credit agency, including Thomas Jefferson University in Philadelphia, Penn State Health in Hershey and ProMedica in Toledo, Ohio.

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