Fitch downgrade underscores pressure at a Wisconsin hospital system

When Fitch Ratings this month downgraded Marshfield Clinic Health System, a nonprofit group of 11 hospitals based in central Wisconsin, to BBB from BBB-plus, it cited operating losses due in part to wage pressures from reliance on contract nurses and temporary physicians. 

The downgrade applied both to Marshfield’s issuer rating and the revenue bonds issued for Marshfield by the Wisconsin Health and Educational Facilities Authority. Fitch assigns Marshfield a negative outlook due to its “limited room” for further financial stressors, the risks around its operating improvement plan and continued pressure from bank covenants.

In January, Marshfield and Essentia Health, based in Duluth, Minnesota, canceled a proposed merger. Marshfield recently said it is furloughing 360 workers, or about 3% of its employees, as it struggles to hit financial targets.

In its rating report, Fitch said its downgrade reflected operating losses from expenses that have not adequately adjusted to revenues as Marshfield tries to integrate after a period of growth. Fitch pointed to “wage and inflationary pressures” and the healthcare system’s heavy use of temporary rather than salaried workers.

“Shortages in nursing and some other clinical areas have resulted in the use of agency nurses and contract labor with hourly wages that are often a multiple of an equivalent employees’ wages,” said Fitch lead analyst Madeline Tretout. “This also applies to doctors, sometimes specialists but also primary care, where there may be some difficulty recruiting; hospitals may rely on locum, which is a more costly option.” Locum is an industry term for physicians on temporary contracts.

The U.S. is facing a healthcare staffing shortfall that has worsened since the COVID-19 pandemic. In a 2023 survey of more than 18,000 registered nurses, AMN Healthcare found that 30% said they planned to leave nursing — an increase of seven points from 2021’s result. And 94% of respondents reported “severe to moderate” staffing shortages in their area, with 80% predicting the shortages will worsen in the next five years. 

As the healthcare labor pool shrinks, so too has the number of non-temporary healthcare jobs available in Marshfield’s region, leaving area healthcare systems understaffed. In the Midwest, according to data from the American Hospital Association, a trade group representing healthcare systems, general nursing job postings declined 1.2% in the second quarter of 2022. They dropped 6.8% in Wisconsin, with critical care-ICU positions down 3%, emergency roles down 6.9% and operating room positions down 9.7%.

Exacerbating this trend for Marshfield is the fact that its rural Wisconsin locations are not known as magnets for young healthcare professionals. A 2020 report from research firm Forward Analytics found that 31 of 46 rural counties in Wisconsin lost residents between 2010 and 2018. Wood County, where the city of Marshfield is located (it also spills into Marathon County), saw its workforce shrink more than 10% during those years. 

The use of contract labor in healthcare has abated somewhat lately, but such contracts “triggered a longer term inflation in wages in the healthcare industry that will stay with us for a while,” said Glenn Melnick, PhD, the Blue Cross of California chair in healthcare finance at the University of Southern California’s Price School of Public Policy.

“We see new contracts with rates of increase above the pre-COVID trend and, depending on the length of the contract, [this] could last for several  years,” Melnick said. “This will have spillover effects on non-contract workers in healthcare. In sum, hospitals will be facing greater labor input costs pressures that they have in the past.” 

Melnick also noted that “most of the poorest performing hospitals are nonprofits.” But he said the extent to which nonprofits struggle more than their for-profit counterparts depends on local market conditions.

During the pandemic, he said, hospitals split off into “haves and have-nots,” with the former now starting to return to pre-COVID performance levels and the latter coming out of COVID in worse shape than before.

“All hospitals have lower performance on operating margins,” he added, “and this is likely to continue given wage pressures and limited increases in Medicare and Medicaid payments.”

Marshfield has fully drawn on $170 million in lines of credit, and has gotten waivers on its quarterly 1.2x debt service coverage from various banks through 2023. Fitch said it will need to stay in touch with its bank group about waivers for both debt service coverage and debt to capitalization, and uncertainty around these talks contributed to its negative outlook.

The healthcare system has about $318 million in private bank debt, but has more than $1 billion in unrestricted cash and investments to address what Fitch sees as the unlikely prospect of any potential acceleration of bank debt.

Under bond documents, Marshfield is in default if annual coverage dips below 1.1x for two consecutive years starting in fiscal 2024. It failed the coverage test the past two fiscal years. 

While Fitch said it believes Marshfield has the capacity to meet its financial obligations, “the current environment of constrained cash flow in conjunction with revenue cycle disruption, which has more recently begun to normalize, has resulted in liquidity distress,” the rating agency noted.

Marshfield has brought in a consultant, per the terms of the bond documents, to help improve debt service coverage, according to Fitch. Marshfield has also, after the Essentia talks broke up, hired a consultant to move forward with a formal process to find an appropriate partner, according to a posting by Marshfield on the Municipal Securities Rulemaking Board.

Fitch believes Marshfield’s operating margins will stabilize by 2025. It said it expects the financial challenges “will begin to moderate” with the implementation of an operating improvement plan which includes over $250 million in “immediate efficiencies.” 

Those efficiencies will come from initiatives including revenue cycle management, denials management, labor efficiency and benchmarking, supply chain management and improved access, Tretout said.

“Fitch views the labor and wage climate as beginning to normalize,” she added. “However, it still remains a challenging environment. Marshfield continues to tackle this issue with various recruitment, retention and onboarding strategies.”

The expected improvement along with adequate balance sheet ratios justifies the system’s investment-grade rating, Fitch said.

S&P Global Ratings assigns its underlying BBB-plus rating to the Marshfield Clinic’s revenue bonds.