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Bond upgrade underscores success of Elkhart General-Memorial merger

Affiliation is already paying off for Elkhart General Hospital, underscored by the recent upgrade in its bond rating by Moody's Investors Service.
Posted on Dec. 30, 2012 at 12:00 a.m.

ELKHART — About a year after affiliation between Elkhart General Hospital and Memorial Hospital of South Bend began, the move is getting an enthusiastic thumbs up from EGH officials.

Most recently, Moody’s Investors Service upgraded the rating of bonds issued by EGH, a sign, a hospital official says, of the improved financial strength of the facility brought on by melding with Memorial into a new two-hospital system.

“It’s working, from an overall standpoint,” said Jeff Costello, chief financial officer for EGH and the Beacon Health System, the new parent organization of the Elkhart and South Bend hospitals. The rating improvement shows “that yes, this affiliation is working, the advantages are clearly being achieved.”

Moody’s last month upgraded the A2 rating on $84.5 million in outstanding EGH bonds from “stable” to “positive.” The Moody’s report cited affiliation with Memorial and suggested further “upward pressure” on the rating — continued upgrades — could be in the offing as the process proceeds.

Leaders from the two independent, nonprofit hospitals decided late last year to affiliate under the umbrella of unified parent organization, what’s now called Beacon Health System. They formally began the process of melding into a unified company on Jan. 2.

Some Elkhart civic leaders opposed affiliation, worried that it would lead to transfer of some medical services from EGH to Memorial, which is a larger hospital, to save money. And there have been bumps along the way — EGH implemented job cuts in March and other money-saving changes to counter a financial loss in 2011, upsetting some workers.

PROS OUTWEIGH CONS

As Costello sees it, though, the positives have outweighed any negatives. He cited some of the factors Moody’s looked at in upgrading its rating:

Ÿ Buying power: Teaming with Memorial in the purchase of supplies permits the two facilities to negotiate discounts on the larger quantities they jointly buy. That’ll allow around $1 million in savings between both hospitals per year compared to what they previously paid.

Ÿ Information technology: Having Memorial as a partner has allowed EGH officials to tap the information technology expertise at the neighboring facility. The result was a shift from outsourcing EGH’s IT services to having them done in house, which ought to save EGH around $1 million per year.

Ÿ Physician recruitment: Affiliating improves the ability to recruit physicians, which will pay off over the long haul by enhancing availability of medical services, not reducing them, as some critics had feared. “What it does is provide a growth path for Elkhart General that just didn’t exist in the past,” said Costello.

Ÿ Merging debt: By joining into a unified system, EGH’s and Memorial’s debt jointly becomes the responsibility of Beacon. The larger revenue resources of the combined entity adds a measure of financial stability, a plus in the view of Moody’s.

CUTTING FINANCING COSTS

Most immediately, the Moody’s rating upgrade potentially allows EGH to refinance some $84.5 million in outstanding bonds at a lower interest rate, saving the facility money. That was the main reason for requesting a review by Moody’s.

But EGH is planning another $89 million in upgrades going forward, including a $74 million hospital expansion, which was previously pegged at around $70 million in all. Bond financing will be sought on around $65 million of the total and having a better rating, again, should reduce the cost of borrowing.

“We do believe it has been a very successful endeavor, both for Elkhart General and the Memorial health system,” said Costello.




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