CARTI's financial woes get appraisal

It hires help after bond rating slips

CARTI in Little Rock has hired a Baltimore consultant to help it address serious financial problems, the facility's top executive said Friday.

CARTI's $49 million revenue bond issue was downgraded this week by Fitch Ratings to BBB-, the lowest investment-grade rating for a bond. If the rating falls below BBB-, the bonds become speculative grade, a Fitch analyst said.

The bond issue helped pay for construction of CARTI's west Little Rock cancer center. The bonds were originally rated BBB+ when issued in 2013 by CARTI, formerly known as the Central Arkansas Radiation Therapy Institute.

The outlook on the bonds, however, remains negative.

"If you take a look at the rating sensitivity, it will tell you we had some questions [about CARTI]," said Eva Thein, the secondary analyst on the ratings report.

Operating losses prompted the downgrade.

The consultant, Berkeley Research Group, is already working at the center, said Jan Burford, chief executive officer.

"We have had three consecutive years of operating losses, and we recognize that we need outside help to assess and make recommendations for areas for improvement," Burford said.

Berkeley has a division that helps health care businesses operate more efficiently, Burford said.

"We have a rather thin management team so it will be good to have a team to provide some extra horsepower to turn over every rock and see how we can be more efficient," Burford said. "We're looking at this not that we need to get back above the bond covenant but how do we really have long-term financial sustainability."

CARTI began work on its $90 million cancer center in 2013. It opened in November last year.

The organization still has not recovered from some major reimbursement cuts by insurance providers, and some of its patients are having difficulty paying their balances, Burford said.

"They are using products through the Affordable Care Act and have extremely high out-of-pocket deductibles," Burford said. "So part of our one-time write-down is we have people in middle income or lower middle income who have such high deductibles they are having difficulty making those payments."

CARTI is a leader in outpatient cancer services in Little Rock and the surrounding market, Fitch said. It also has 19 satellite sites around the state.

"Still, CARTI's relatively small, unaudited operating revenue base of $158 million in fiscal 2016 means it remains vulnerable to changes in its clinical staff and payer arrangements, as evidenced by its operating losses in fiscal 2016," Fitch said.

CARTI had an operating loss of $7.8 million in fiscal 2016 compared with a budgeted operating income of $2.3 million, Fitch said.

CARTI's 2016 performance was affected by a loss of patients attributed to physician staff problems and some slowdown associated with the move to the new facility, Fitch said.

Other problems CARTI faced in 2016 included a computer conversion and problems with new equipment it had ordered, Burford said.

"We had a number of one-time events," Burford said.

In addition, CARTI had payer-contract problems with Arkansas Blue Cross and Blue Shield and Caremark, a division of CVS Pharmacy, Fitch said.

The problem with Blue Cross and Caremark is an ongoing concern, Burford said.

"It is not as big a dollar amount," she said. "But we started our own oral chemotherapy program. We were able to do it for all our patients except for those that have insurers who use Caremark as their pharmacy provider. We applied for [approval] over a year ago, and they still have not approved it. That's kind of a national thing -- they are not approving anybody. But we had anticipated that we would have that program available for everyone. But it's not available for Blue Cross and maybe a few other patients."

Edmond Hurst, senior managing director at Crews & Associates, a Little Rock bond firm, said he is familiar with a number of bond issuers who have gotten into similar situations.

"When those borrowers took on a large capital project, it can take a few years to digest that and get all those systems implemented," Hurst said. He is not familiar with CARTI's losses, Hurst said.

A BBB- rating indicates that there is a strong likelihood of repayment, Hurst said.

Fitch said it will review recommendations from the consultant along with the results of the fiscal second quarter, which should be released in early 2017. At that time, Fitch said, it "may take rating action as appropriate."

And if CARTI doesn't have an improved operating performance in fiscal 2017, it "would likely result in a rating downgrade," Fitch said.

A Section on 09/24/2016

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