Moody's Investors Service lowered West Penn Allegheny Health System's credit rating by three notches to Ca, or “highly speculative,” from Caa1.
The downgrade leaves the distressed health system's credit one notch above Moody's lowest credit rating. Pittsburgh-based West Penn Allegheny's deteriorating finances, the system's failed attempt to break off an acquisition by the insurer Highmark and expected further delays to closing that contentious deal prompted the downgrade, Moody's analysts said in a report.
Moody's analysts said the rating action “reflects the severity of the financial status of the system and our belief that there is a high likelihood of a restructuring or bankruptcy filing, with or without the closing of an agreement with Highmark,” a rating report said.
West Penn Allegheny last week lost a legal battle to call off its deal with Highmark after a Pennsylvania judge rejected the health system's claim that Highmark violated terms of the agreement and awarded a preliminary injunction
to stop West Penn Allegheny from finding a new partner.
The wrangling will likely make “future negotiations more contentious and prolonged,” which would slow efforts to reverse West Penn Allegheny's operating losses, Moody's said. The system said in unaudited financial statements that it lost $112.5 million on operations
for the year that ended in June compared with $51.8 million the prior year, losses Moody's called “very high.”
Moody's also said the system “would have largely depleted its cash” without $200 million from Highmark. The insurer agreed to $400 million in grants and loans and pledged $75 million to medical education under its agreement to acquire West Penn Allegheny.
In a statement to investors (PDF)
, West Penn Allegheny said it was “not surprised” by the downgrade and understood Moody's unfavorable view of the recent court decision. The system also agreed that regulators have been slower to approve Highmark's acquisition of the system than originally planned. “Nonetheless, WPAHS continues to believe that an affiliation with Highmark is in the best interests of both organizations and of the greater community, and has agreed to work diligently in the days ahead with Highmark” to win regulatory approval, the statement said.
Leaders from Highmark and West Penn Allegheny met on Monday to talk about the system's finances and regulatory review of the acquisition, Highmark said in a statement. “Both parties realize there are significant issues that must be addressed and that prompt action is essential,” the statement said.