Heath System’s Bond-Rating Slips a Notch

Citing “weaker-than-expected financial performance” due to decreased reimbursements and increased competition, Moody’s Investors Service recently downgraded the University of Pennsylvania Health System’s bond-rating from Aa3 to A1.
    Lori Doyle, chief public-relations officer for UPHS, downplayed the significance of the July action and said that the bond-rating is still higher than that of any other academic medical center in the region. “We think Moody’s downgraded our bond-rating primarily because of concerns they have with the Philadelphia market in general, especially with the situation that Allegheny faces,” she said. (Allegheny Health, Education, and Research Foundation recently filed for bankruptcy protection for most of its Philadelphia-area operations, though according to Lisa Martin, vice president of Moody’s health-care rating group, the decision to downgrade the bond-rating was not directly influenced by Allegheny’s troubles, apart from the “common regional pressures they both face.”) While a lower credit-rating can raise the interest rate on an institution’s debt, Doyle said: “We don’t expect the minimal change in our bond-rating to affect our debt-service,” which tends to be affected more by the bond market’s overall performance.
    In assigning a “stable” outlook to the lower rating-level, Moody’s asserted that the health system’s “solid market position, excellent clinical reputation, and strong financial reputation will serve to offset weaker financial performance.” Meanwhile, Standard & Poor’s, another bond-rating agency, recently reaffirmed UPHS’s higher AA rating, though revising its outlook on that rating from “stable” to “negative.”
    The financial performance of UPHS also prompted Moody’s to revise its outlook on the Aa2 bond-rating of the University as a whole from “stable” to “negative” — without, however, actually lowering the rating itself. (UPHS is a division of the University.) “Partially offsetting the strains on the University’s health system is continued strengthening in the University’s student market position, research, fundraising, and financial resource base,” the agency’s report explained.
    According to Doyle, UPHS had budgeted for an $80-million-to-$100-million operating loss for the 1998 fiscal year, but early indications show that the health system finished the year “much better than expected.” She attributed the losses that did occur to increased charity-care provided by the hospital to those no longer insured through Medicaid because of welfare reform; to the Balanced Budget Act, passed by Congress in 1997, which had an adverse impact on Medicare reimbursements; and to the health system’s merger with the debt-ridden Pennsylvania Hospital last October. But, she added: “We’re confident that Pennsylvania Hospital will experience a positive turnaround within two years.”
    Ironically, in the same month as the downgrade by Moody’s, the Hospital of the University of Pennsylvania placed 11th in U.S. News & World Report’s annual rankings of “America’s Best Hospitals.” HUP ranked fourth on the eastern seaboard, according to the report in the magazine’s July 27 issue.

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