Pittsfield, Mass.-based Berkshire Health Systems Inc. is in danger of a downgrade this week by Standard & Poor's Corp., although officials at the medical institution say complete is imminent.
"Because of the operating loss, the deteriorating economy, deteriorating admissions, and increased bad debt, I expect that we're going to take some action in the next several days," said John Fargnoli, senior vice president at Standard & Poor's.
Standard & Poor's put the issuer on negative CreditWatch in early November, saying declining profitability "will probably result in a technical default." The agency noted that Berkshire Health Systems, the acute-care hospital division of Berkshire Medical Center, was facing a $7 million loss for fiscal 1991, which ended Sept. 30.
The losses "have had little to do with the operations or fiscal soundness of the acute-care facilities," said John Rogers, general counsel to Berkshire Health Systems.
Only $5.5 million of A-rated municipal notes would be directly affected by the agency's action, yet a downgrade is certain to taint nearly $140 million of insured and privately placed tax-exempt debt -- $62 million of which was issued by the hospital division and $76 million by the nursing home affiliate, Berkshire Health Care.
David Phelps, vice president at Berkshire Health Systems, disputed each of Mr. Fargnoli's points, asserting that the losses were confined to the first quarter of 1991, admissions are on the rise, and the debt is under control. In fact, a downgrade would only belatedly acknowlede events that already are being addressed, he said.
"We are positioned well," Mr. Phelps said. "The acute-care operation continues to be operationally sound and fiscally strong relative to other hospitals in Massachusetts, and [on the nursing home] side, the trends are also encouraging -- despite a slow start."
Municipal Bond Investors Assurance Corp. insured $45 million of the hospital debt in 1989. Banque Paribas backed a $10.9 million sale with a letter of credit and extended a direct taxable loan to the hospital side.
William P. Condon, senior vice president and director of health care at MBIA, sided with the hospital officials in evaluating Berkshire. "The problem is essentially on its way to being corrected," Mr. Condon said.
All of the parties involved agree that Berkshire's late-1980s nursing home expansion led to the current straits, with hospital officials insisting that the worst is over. Mr. Rogers said the deep deficits resulted from structural hurdles endemic to opening new nursing homes.
"Nursing homes have to be fully staffed and equipped at a certain level before they can be licensed," Mr. Rogers said. "There's a lag between the outflow of operational expenses and the inflow of Medicaid reimbursements -- that gap was longer and deeper than expected.
"Recognizing some of those startup losses this year resulted in an unusually large loss for Berkshire Health Systems," Mr. Rogers continued. "But things are going quite well now. We are seeing events unfold as we would have liked, we've made adjustments to ensure that we return to profitability, and [admissions] volume is running slightly ahead of projections."
A major factor weighing in Berkshire Medical's favor is its "dominant provider" status in Berkshire County. Mr. Phelps explained that the nearest facilities of similar size and nearest facilities of similar size and service capacities are in either Springfield, Mass., or Albany, N.Y. -- in both cases about an hour away. Such a position ensures a steady flow of admissions, he said.
Mr. Condon of MBIA agreed. "The key to Berkshire's strength is that it is the sole provider in Western Massachusetts," he said. "It's not like [patients] can say, 'There's a difficulty here and we're going to go somewhere else. The demand is going to continue the same, and we view it as a stable service area."
The problems at Berkshire led the hospital division's board of trustees to proceed with a management shakeup. John Johnson, chief executive officer, and Thomas Clark, treasurer of BErkshire Health Systems, both were let go. Last month, a nine-year veteran of the medical center -- Keith Pryor -- was appointed president and chief executive officer.
Although local press reports said the former officials were laid off because of high salaries, Mr. Phelps said the motivating factors was the transfer of "several million dollars" from the hospital division to the nursing home balance sheet. "The advances did not have board approval," Mr. Phelps said.
MBIA was concerned with the transfer of funds, but Richard Quimby, vice president in surveillance at the bond insurer, said such an event will not take place again.
"We had a meeting with the hospital to address the problem, and they have taken steps to rectify" the situation, Mr. Quimby said. "They have a reassessed their strategies as far as the nursing homes go."