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Fitch Ratings Upgrades Marshfield Clinic Health System's Ratings, Reflecting Merger with Sanford Health

Strategic Insights

— 2 min read

Fitch Ratings has upgraded Marshfield Clinic Health System's (MCHS) Issuer Default Rating (IDR) and revenue bonds, issued by the Wisconsin Health and Educational Facilities Authority (WHEFA) on behalf of MCHS to 'A-' from 'BBB'. The upgrade reflects the merger between Sanford Health (AA-) and MCHS, effective January 1, 2025, which is expected to bring significant financial and operational benefits to the combined entity.

The merger is expected to resolve operating challenges at MCHS, including a cost base that has not adequately adjusted to variable revenues amid rapid growth and high medical loss ratios (MLRs) at the health plan. Although MCHS has reported a decline in operating losses since fiscal 2022, the company still faces operational risks, including the strain from rapid integration of facilities, reliance on contract staff, and macroeconomic pressures and IT conversions.

Fitch believes that MCHS's merger with Sanford supports at least an 'A-' rating, and the Rating Watch Positive reflects the expectation that the combination of the Sanford and MCHS obligated groups will occur within the next six months. Fitch will re-evaluate MCHS's rating at that time in the context of the combined organization.

Key Takeaways:

  • Fitch Ratings has upgraded MCHS's IDR and revenue bonds to 'A-' from 'BBB', reflecting the merger with Sanford Health.
  • The merger is expected to resolve operating challenges at MCHS, including a cost base that has not adequately adjusted to variable revenues amid rapid growth and high medical loss ratios (MLRs) at the health plan.
  • MCHS has reported a decline in operating losses since fiscal 2022, but still faces operational risks, including the strain from rapid integration of facilities, reliance on contract staff, and macroeconomic pressures and IT conversions.
  • The combined organization is expected to have a stable payor mix, with combined Medicaid and self-pay totaling about 15% of gross revenues.
  • Fitch views MCHS's current liquidity, with about 140 days cash on hand, as adequate for the rating level in the context of implied support from Sanford.
  • Fitch's forward-looking scenario analysis indicates MCHS's key liquidity and leverage metrics will begin to improve to levels consistent with the 'bbf' financial profile, as cash flow improves and spending moderates, particularly with Sanford's commitment to invest $500 million in MCHS.

Statistics:

  • MCHS's operating loss declined to $151.6 million in fiscal 2024, down from $250 million in fiscal 2023.
  • MCHS's cash to adjusted debt ratio was about 58% as of FYE 2024, compared with cash to adjusted debt of about 102% as of FYE 2021.
  • Fitch views MCHS's current liquidity, with about 140 days cash on hand, as adequate for the rating level in the context of implied support from Sanford.
  • The combined organization is expected to have a stable payor mix, with combined Medicaid and self-pay totaling about 15% of gross revenues.

Sources:

  • Fitch Ratings U.S. Not-For-Profit Hospitals and Health Systems Rating Criteria (pub. 12 Nov 2024)
  • Fitch Ratings U.S. Public Sector, Revenue-Supported Entities Rating Criteria (pub. 10 Jan 2025)
  • DIVER by Solve
  • Fitch Ratings Rating Definitions Document
  • Fitch's regulatory affairs page
  • Fitch Ratings press release dated [insert date]

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