Lifespan N.I. cut in half for 2013, forces creation of $15M debt fund

(Updated, 9 p.m.)

PROVIDENCE – With a decline in net income of 59 percent for its fiscal 2013, Lifespan gave tangible evidence that its financial prospects are becoming more challenging.

In financial statements released Thursday, the state’s largest private employer – parent to Rhode Island Hospital, The Miriam Hospital, Newport Hospital, Emma Pendleton Bradley Hospital, Gateway Healthcare and a number of other entities – posted total revenue of $1.82 billion, an increase of 4.7 percent on the fiscal 2012 year, ended Sept. 30.

However, thanks in part to a 23 percent increase in its provision for bad debt to $110.98 million, as well as a 6.9 percent increase in compensation and benefits expense to $1.07 billion, the health care system saw its net income for the year drop 59 percent to $16.99 million.

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The fiscal 2013 results make clear what Lifespan is facing in the near future, and why its board of directors approved a fiscal 2014 budget in September that projected a negative bottom line, the first time in more than a decade that that was the case.

One immediate result of the poor showing for the year was a requirement that Lifespan establish a debt-service reserve fund in the amount of $14.9 million to satisfy the terms of its bond-insurance policy with Assured Guaranty Ltd.

The policy covers $192 million that Lifespan borrowed from the New York-based lender in 2006 and contains a provision stipulating that Lifespan’s net income be at least twice the amount of its maximum annual debt service.

For fiscal 2012, Lifespan’s net income stood at 3.68 times its debt service, but that figure dropped to 1.69 times the debt service in the just-concluded year when net income fell to $16.99 million.

During the same period, Lifespan’s days cash on hand – or the number of days of operating expenses that Lifespan could pay with its current cash available – fell from 154 days to 141 days.

Since Lifespan’s net income has fallen below the predetermined minimum, the hospital network must now commit to establishing a debt-service reserve fund to ensure the money owed bondholders will be there if needed.

Lifespan is currently negotiating its options over the debt-service reserve fund, according to an emailed statement from Lifespan spokeswoman Gail Carvelli, and expects to reach a resolution in the next month.

“Lifespan does not owe any money to Assured Guaranty,” said Carvelli in a phone interview. “We are required to fund the debt-service reserve fund, which means moving $15 million of our own money into a separate account that is still owned by Lifespan.”

Carvelli pointed to broader forces, beyond the confines of the Ocean State, as an explanation for the company’s falling net income.

“The impact of the unique dynamic in play nationwide helps explain our declining system-wide financial performance, which went from an operational gain in fiscal year 2012 of $18 million to an operational loss of $19 million in fiscal year 2013,” said Carvelli in the email statement.

The effort to reduce staff expenses raised the company’s costs temporarily as well: “We implemented a restructuring initiative designed to make us more efficient and cost effective,” said Carvelli. “This initiative included a number of one-time expenses that were necessary to implement the program, such as offering eligible employees a voluntary retirement program.”

At the same time, Lifespan noted in its financial statements that the full-time equivalent count increased by 546 over the year, which added about $50.5 million in compensation and benefit expense. The breakdown for the additional staff was as follows: the Gateway merger (which did not require any cash outlay by Lifespan and in fact added $22.03 million to its bottom line) added 184 FTEs; The Miriam Hospital added 126 FTEs (40 due to the creation of the Cardiovascular Institute there); Lifespan Physician Group added 143 FTEs; Bradley Hospital added 44; and Rhode Island Hospital added 21 FTEs to the corporate count.

Carvelli added that a missed covenant regarding the debt-service reserve fund did not indicate any violation of a debt covenant with bondholders

“When we borrowed the money in 2006, we did not fund a debt service reserve fund,” she said. “The insurance company agreed with that approach, but stipulated if we fell below a certain measure, which is much stricter than the actual bond covenants, we would need to fund the debt-service [reserve fund].”

At the same time that Lifespan was feeling pressure from a broad array of factors, it did show one significant positive sign. Cash flow from operations increased 62.5 percent to $69.34 million for fiscal 2013, showing that the core product Lifespan provides – health care services – is operating in the black, at least for the time being. And this operating success helped the system show an increase of 9.7 percent in net assets to $1.47 billion as of Sept. 30.

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