Providence, post-Hoag, plots $712 million California expansion

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Providence will invest $712 million to expand inpatient and outpatient care in Southern California, the health system said Monday.

Providence Mission Hospital in Mission Viejo will add a 100-bed patient care tower and a multispecialty ambulatory surgery center.

The tower will provide private rooms, operating suites and cardiac catheterization labs that will improve its neurology, cardiovascular and maternity care. Providence will move its inpatient psychiatric services from its Laguna Beach hospital to the new tower.

The health system plans to add two outpatient centers in Mission Viejo and San Clemente, where emergency medicine physicians, primary-care physicians, OB/GYNs and other specialists will offer high-acuity urgent care. Construction is set to start in the fall of 2023 and take at least five years to complete.

The Southern Orange County area is growing significantly, said Kevin Manemann, divisional chief executive for Providence South. Many of the residents are at least 55 years old and will need more healthcare, he said.

“We want to give the 800,000 people south of the El Toro ‘Y’ a state-of-the-art center and all of the care they need without having to travel,” Manemann said.

The Southern California market accounted for about 31% of Providence’s operating revenue as of the end of 2021. But that dropped to roughly 27% for the six-month period ending June 30 after Providence and Hoag—a small but profitable health system in Southern California—broke up their merger earlier this year.

Hoag claimed the 51-hospital Catholic system based in Renton, Washington, didn’t hold up its end of their population health initiative. Hoag represented 7% of the Providence’s operating revenues and 17% of the system’s unrestricted cash and investments, according to Fitch Ratings, which in April downgraded Providence’s long-term rating on $6 billion of outstanding debt from ‘AA-‘ to ‘A+.’ The Hoag separation dented non-operating revenue by $3.4 billion.

While the main driver of the rating downgrade was consecutive years of operating losses, the Hoag separation played a small role and had a dilutive effect, said Kevin Holloran, senior director at Fitch.

“The main credit concern is operating income losses for the second year in a row, with losses expected again in 2022 as well, as Providence course corrects back to positive operating margins,” he said.

Days cash on hand and Providence’s cash-to-debt ratio look roughly the same before and after the Hoag divorce, Holloran added.

Providence recorded a $714 million operating loss on $27.33 billion of operating revenue in 2021, driven by a double-digit increase in labor expenses. Still, the health system was buoyed by $1.23 billion in non-operating gains.

Providence generated a $306 million operating loss on $25.68 billion of operating revenue in 2020. It received more than $1.3 billion in COVID-19 relief grants as of June 30.

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