Refinancing bonds could save combined GHS-Palmetto Health $100 million

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Greenville Health System officials say the new integrated health system created to oversee a new partnership between GHS and Palmetto Health could save between $80 million and $100 million if it is allowed to refinance a combined $1.5 billion in debt.

The partnership, which creates the state’s largest health care organization that reaches half of South Carolina’s residents, was finalized late last month.

The new company under which the Greenville Health System and Palmetto Health will operate will be one of the 50th largest hospital systems in the nation, and the largest in South Carolina, serving 1.2 million patients a year, earning a projected $3.9 billion in annual net revenue, and covering half the state.

Greenville Health System has approximately $600 million in existing debt. Palmetto Health owes $863.5 million.

“This is a request to refinance existing debt; the new health company is not financing any new projects at this time,” said Sandy Dees, GHS spokeswoman. “Like other not-for-profit organizations, the new health company will use bonds as a funding tool for our work. As a mission-driven organization, we continually look for ways to meet our patients’ growing health care needs, while also addressing rising costs.”

The South Carolina Jobs Economic Development Authority would issue the new hospital revenue bonds to pay off bonds that were used for projects at Greenville Memorial Hospital, GHS Patewood campus, Hillcrest Hospital in Simpsonville, Greer Memorial Hospital, North Greenville Hospital, and Oconee Memorial Hospital. Palmetto Health has outstanding bonds for Palmetto Health Richland, Palmetto Health Baptist Parkridge, and Palmetto Health Tuomey in Sumter.

GHS has asked the Greenville County Council and the Oconee County Council to approve resolutions supporting the refinancing because those are the counties in which bond-funded facilities are located.

If Greenville County Council does not approve the refinancing, the new health care company could not refinance the Greenville County portion of the bonds. “As we’ve said before, taxpayers are absolutely not responsible or liable for repayment of these bonds,” Dees said.

Lower interest rates than what were available when the bonds were issued are available now, and the hospital said it is trying to refinance the bonds by Dec. 31 because the proposed House tax bill eliminates tax-exempt bonds for 501(c)(3) hospitals after that date.

“We have been advised that the ability to market debt in 2018 may be severely limited,” Dees said.

Big Deal

When it was proposed in June, GHS said the partnership would allow the hospitals to offer services that they would not be able to offer singularly. In addition, hospital officials have said combining the hospital systems could expand medical school training and clinical research.

However, some elected officials said they feared it would reduce competition and increase costs.

“Both the South Carolina attorney general and the Federal Trade Commission reviewed this matter. Both looked at the impact this partnership could have on competition and choice, together reviewing thousands of documents and weighing expert opinion from anti-trust economists who looked at potential impact on competition,” said Sandy Dees, GHS spokeswoman. “After a consecutive 60-day period, both closed their investigations and opted to take no further action, allowing the partnership to move forward.”

The hospitals’ banding together mirrors a trend seen throughout the country, one that experts have said likely will continue as hospitals try to navigate a changing health care environment where hospitals are paid based on outcomes, not numbers of services provided. The partnership is the biggest hospital deal ever in South Carolina, surpassing the merger of Roper and Bon Secours St. Francis in Charleston and of Richland Memorial Hospital and Baptist Health Care in Columbia in the late 1990s.

GHS’ governance has been a matter of contention for more than a year. Some members of the Greenville County Legislative Delegation filed a lawsuit over GHS’ transformation into two separate nonprofit groups, the Strategic Coordinating Organization (SCO) and the Upstate Affiliate Organization (UAO). The UAO will handle day-to-day operations of GHS, and the SCO will guide the UAO. The Supreme Court refused to take up the matter, but the issue is not entirely settled, as the lawsuit is still pending in the Greenville County Court of Common Pleas.

Not on the Hook

 Dees said if the refinancing were approved, taxpayers would not be on the hook for repayment of the bonds.

A section of the resolution under consideration by the Greenville County Council says, “The bonds shall not constitute an indebtedness of Greenville County within the meaning of any State Constitutional provisions or statutory limitations and shall be payable solely from revenues as set forth in the authorizing documents of the Bonds. The full faith, credit, and taxing powers of Greenville County are not pledged to secure the bonds.”

In May, Fitch affirmed GHS’ AA- credit rating and called the hospital system’s rating outlook stable.

Fitch said GHS posted a dramatic improvement in its operations following a $15 million operating deficit through the first four months of 2016, which it said was primarily attributable to a light flu season and costs associated with its EPIC electric health record implementation. Since then, GHS showed a turnaround of more than $35 million in its profitability, posting operating income of $18.6 million for fiscal 2016 and $20.9 million for the first six months of 2017, Fitch said.

Fitch said the change in legal status from a public entity to a private nonprofit should “remove significant barriers the organization has confronted when pursuing beneficial strategic affiliations, which should allow it to maintain its leading footprint in its service area. The change also allowed GHS to implement a new investment policy to diversify its asset allocation, which should help increase liquidity and be additive to its bottom-line performances.”

In the report, Fitch said GHS was nearing its debt capacity at the current rating level and additional debt without a commensurate increase in cash flow would likely pressure the rating.

Fitch affirmed Palmetto Health’s BBB+ credit rating in April. In its ratings report, Fitch said Palmetto’s operating losses in the first quarter of fiscal 2017 “represent a departure from recent profitability trends at the system.” The Fitch report said the $9.8 million operating loss in the first quarter was primarily driven by higher than expected labor expense, partly due to the competitive market for nursing staff in Columbia.

“Fitch’s long-term expectations are that Palmetto’s market position and broader reach will allow the organization to return to historical profitability in the near future,” the report said.

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