Clarian grows market share to 40 percent

Clarian Health has been growing faster than its peers in the Indianapolis market the past five years, according to a report this month by Moody’s Investors Service.

That positive trend led New York-based Moody’s to hike its rating of Clarian’s bonds to A1 from A2.

Clarian’s share of the inpatient market in and around Indianapolis reached 39.5 percent in 2009, up from 35.3 percent in 2005, according to Moody’s report, which includes only the four major hospital systems in the city. That puts Clarian well ahead of St. Vincent Health (25 percent), Community Health Network (22 percent) and St. Francis Hospital & Health Centers (14 percent).

Moody’s also noted that Clarian enjoys a leading market share—by at least 5 percentage points—in such lucrative service lines as cancer, neurology and orthopedics. However, in cardiology it is tied with two other hospital systems.

“Clarian has implemented an aggressive strategy to grow its market presence in Indianapolis and throughout the state of Indiana that has resulted in meaningful market-share growth and very good volume growth at a time when many health systems nationally are facing flat or declining volumes as a result of the economy,” wrote Moody’s analysts Lisa Martin and Beth Wexler.

They also noted that Clarian grew its inpatient admissions, excluding gains from newly merged facilities, by 4 percent in 2009 and by another 6 percent through the first nine months of 2010.

Clarian had been running at operating margins between 0.5 percent and 1 percent in recent years, but bumped those up to 4.6 percent, or $174 million, last year. This year, the operating margin is even higher, at 4.9 percent through the end of September.

Other Indianapolis hospital systems have yet to publish third-quarter financial data. However, St. Vincent Health recorded a margin on operations of 8.3 percent, or $158 million, in the year ended June 30.

In spite of Clarian’s recent growth, it still has only 153 days' cash on hand, a key measure of financial strength and flexibility. Clarian is still well below the “gold standard” of 200 days cash on hand.

Other things that concern Moody’s about Clarian are its risky investment portfolio—25 percent of its investments in hedge funds, which cannot be liquidated in less than 30 days—and its large interest-rate-swap program. Such programs got hammered in value during the 2008 Wall Street meltdown and still face some risk of collateral calls by banks.

Moody’s analysts said Clarian’s heavy investment in acquiring and affiliating with physician groups will take time to pay off. In the meantime then, the hospital system must bank on negotiating regular rate increases with health insurers and continuing to receive $100 million or so each year in “disproportionate share” money from the Indiana Medicaid program.

“While Clarian is projecting to maintain strong margins,” Martin and Wexler wrote, “there could be several challenges to operations.”