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

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 multidisciplinary outpatient surgery center.

The tower will feature private rooms, operating rooms and cardiac catheterization labs that will improve neurological, cardiovascular and maternity care. Providence will move its inpatient mental health 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 physicians, primary care physicians, obstetricians/gynecologists and other specialists will provide acute emergency care. Construction work is scheduled to begin in autumn 2023 and last at least five years.

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

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

The Southern California market accounted for about 31% of Providence’s operating revenue at the end of 2021. However, in the six months ended June 30, after Providence and Hoag — a small but profitable healthcare system in Southern California — that dropped to about 27% — dissolved their merger earlier this year.

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Hoag claimed the 51-hospital Catholic system in Renton, Washington, did not stop the demise of his public health initiative. According to Fitch Ratings, which in April downgraded Providence’s long-term rating on $6 billion of outstanding debt from “AA-” to “A+,” Hoag made 7% of Providence’s operating revenue and 17% of its unrestricted cash and cash equivalents system investments. The separation from Hoag took $3.4 billion off non-operating revenue.

While the primary reason for the rating downgrade was consecutive years of operating losses, the split from Hoag played a small role and had a dilutive effect, said Kevin Holloran, a senior director at Fitch.

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

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Providence’s available days and cash-to-debt ratio look about the same before and after the Hoag divorce, Holloran added.

Providence posted an operating loss of $714 million on operating income of $27.33 billion in 2021, driven by a double-digit increase in labor costs. Still, the healthcare system was propped up by $1.23 billion in non-operating profits.

Providence generated an operating loss of $306 million on operating income of $25.68 billion in 2020. As of June 30, the company had received more than $1.3 billion in COVID-19 relief grants.

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