CommonSpirit aims to cut $2 billion in costs in four years

TARA BANNOW  June 07, 2019

Newly formed CommonSpirit Health announced Friday an ambitious plan to shave $2 billion off its costs over the next four years.

Executives with the Chicago-based health system, formed through the February merger of Catholic Health Initiatives and Dignity Health, said on an investor call Friday the savings will come from both merger-related synergies and performance improvement strategies.

"We have to bring down the cost of care even to stay at current performance levels," Dan Morissette, CommonSpirit's chief financial officer, said on the call.

CommonSpirit last week disclosed an underwhelming financial performance in the third quarter of its fiscal 2019, including a $100 million operating loss and a slight decline in revenue.

The health system's days cash on hand and cash-to-debt ratio "eroded slightly" in the quarter, reflecting its lower cash position since the end of its fiscal year, Lisa Zuckerman, CommonSpirit's senior vice president of treasury and strategic investments, said on the call. Days cash on hand was at 146 in the third quarter 2019, slightly below its goal of 150. Cash-to-debt slipped to 81%.

CommonSpirit plans to reach its $2 billion goal through performance improvements like lower lengths of stay, improved product utilization and standardization and effective labor and revenue cycle management, Morissette said. On the synergy side, the health system will eliminate duplicative administrative functions, generate supply chain savings, information technology savings and more favorable consulting and legal contracts, for example.

"We need to be thoughtful but swift in gaining these improvements," he said.

Along with the cost savings, CommonSpirit plans to improve its earnings before interest, taxes, depreciation and amortization margin to 8% in 2023.

Later this summer, CommonSpirit also plans to refinance nearly $6 billion of its roughly $13.7 billion in outstanding debt. That will happen through tax-exempt current refundings, tax-exempt advance refundings, taxable refinancing and short- to long-term refinancing.

Zuckerman said CHI and Dignity have not yet merged their investment programs because of restrictions in their current debt agreements.

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