Is EBITDA a Fairy Tale? – Part 2
Yesterday, we posed a question about EBITDA, a means of examining earnings, and its relationship to CHS. We left off with a few important questions: Is there a tooth fairy—and is CHS’s financial position sustainable?
So, let’s return to our analysis with a look at CHS’s operations. A headline in Becker’s Hospital Report stated, “CHS expects $137 million loss in the second quarter”–that being the quarter just ended, Q2 2017 (http://www.beckershospitalreview.com/…/chs-expects-137m-net…).
CHS total admissions were down 10.8% compared to Q2 2016. Now, it’s true that this reflects a larger trend in healthcare due, in part, to patients having higher insurance co-payments, an outcome of the Affordable Care Act. However, CHS also attributed losses to higher expenses related to hospital divestitures, purchased services, medical specialist fees and information services—again, as reported by Becker’s. Employees report also that Lutheran is losing market share to Parkview. In short, when visits are down, income is down.
Also, according to LHN nurses, salaries have been low for nearly a decade, and so the announced wage increase (plus the likelihood of inflation) will drain cash. And the complaint that Lutheran Hospital is “Dingy, dirty…”
reflects Warren Buffett’s suggestion that CHS will need to pay for depreciated items that are no longer appropriate or fail the current standards of care. And that means more cash will be needed.
Thus, when “guidance numbers are missed,” or when CHS fails to “make projected earnings,” or when losses are announced, it means that CHS must allocate cash that is increasingly scarce. Bankers, who loaned money for CHS to buy 70 hospitals from Health Management Associates (HMA) for $7.6 billion, will be looking for interest coverage—enough cash to pay interest even if the principal cannot be paid. That cash will keep the wolves from the door. But patients and caregivers will be looking for Gavin’s “cash for future asset needs,” Buffet’s “capital expenditures”—ultimately, CASH to replace depreciated, worn items. Not cash for corporate jet airplanes, and not cash for CHS executives in Nashville.
And so, CHS has announced (as reported in Becker’s Hospital CFO Report, July 27—
that they will return, however reluctantly, to selling hospitals–and thus, the people in them. This isn’t a game of Monopoly; these are institutions critical to every community they serve and to the jobs of their employees. But, the money will go toward debt reduction, and therefore to reduced interest payments—a credit enhancement feature required by recent lenders who refinanced CHS debt (see http://www.reuters.com/…/fitch-rates-community-health-syste…).
Hospital sales will help interest coverage, but will declines in operating revenue bleed so much cash as to deny needed hospital upgrades? At LHN, it should not. After all, CHS’s earnings from northeast Indiana were greater than $280 million. What needs to come out of the EBITDA “blender” is CASH, cash for northeast Indiana, from northeast Indiana. And, certainly not “over a five to six year period” the time period floated by CHS. For patient safety, for treatment quality, and for patient experience, LHN upgrades are needed now.
We can’t wait for the tooth fairy. And we certainly can’t wait to learn whether or not the tooth fairy is real.