West Penn Allegheny Health System—the distressed partner in a contentious and closely watched healthcare acquisition deal—posted another operating loss for the first three months of its fiscal year.
West Penn Allegheny, a Pittsburgh hospital operator with deteriorating finances, reported an operating loss of $28.3 million on revenue of $378.2 million for the three months that ended in September. That's more than the system lost during the same period the prior year ($27.1 million on revenue of $370.5 million).
The health system's poor financial health has strained talks (nearly to the breaking point) between West Penn Allegheny and Highmark, the Pittsburgh insurer that agreed more than a year ago to acquire the system. A dispute over how to address West Penn Allegheny's finances landed in court in September. A judge sided with Highmark after West Penn Allegheny balked at a proposed debt restructuring by trying to break off the deal.
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Fitch Ratings lowered its already low rating for West Penn Allegheny Health System to CCC from B+, a multi-notch drop, as the chance of debt restricting grows and an acquisition by Highmark looks less certain.
The news came as the financially strapped health system and Highmark, a Pittsburgh insurer, went before a Pennsylvania judge for a hearing on West Penn Allegheny's recent bid to back out of its acquisition by Highmark in order to search for another buyer. The system announced the deal was off in late September and Highmark quickly sued to stop West Penn Allegheny from talking to new suitors.
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One major credit rating agency upgraded more not-for-profit hospitals and systems than it downgraded between July and September, and deals—mergers, acquisitions and leases—were behind better credit in several cases.
Moody's upgraded 12 not-for-profit healthcare borrowers with $3.2 billion in outstanding debt last quarter compared with the seven downgraded borrowers with $957.3 million of debt, Moody's said in a new report.
Indeed, deals have been so numerous and have so influenced credit that Moody's Investors Service now says it was wrong earlier this year when it said that 2012 would likely close with more downgrades than upgrades. The year may end with an equal number of each, the report said. “We're not prognosticators here,” said Moody's associate analyst Carrie Sheffield. “We do have a negative outlook for the sector” and analysts expected to see more downgrades than upgrades, she said.
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New court records in the disputed breakup of West Penn Allegheny Health System and Highmark suggest that the system's continued financial distress left the insurer with a nagging sense of buyer's remorse.
Highmark, which last year agreed to acquire West Penn Allegheny for $400 million in grants and loans and another $75 million commitment to medical education, presented the health system in August with analysis “suggesting that Highmark is overpaying for West Penn Allegheny,” according to the health system's latest court filings.
The pair ended up in court this month after Highmark sued to stop West Penn Allegheny from looking for a new buyer. West Penn Allegheny said in late September it would seek a new buyer after Highmark demanded new terms and insisted the system restructure its debt in bankruptcy.
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Chilton Hospital officials saw greater access to capital for ambulatory expansion, information technology and other investments to prepare for accountable care as one compelling reason to join a larger health system.
Another reason: The possible arrival in New Jersey of the joint venture between Ascension Health Alliance and the private equity firm Oak Hill Capital Partners to build a Catholic for-profit health system.
Deborah Zastocki, president and CEO of Chilton Hospital, said the independent hospital, which announced board approval for a merger with Atlantic Health System this week, reconsidered its solo status in response to changes in healthcare delivery, but also potential changes to New Jersey's healthcare marketplace.
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The three major players in Pittsburgh's healthcare market—West Penn Allegheny Health System, Highmark and the University of Pittsburgh Medical Center—have a combative and litigious history (for a review, see here). Now, the possible breakup of an alliance between West Penn Allegheny and Highmark, an insurer, has landed two of those players back in court.
Highmark said in court filings this week that West Penn Allegheny had no grounds to exit the deal the partners signed almost a year ago. (“It is truly sad that Highmark has taken this step,” West Penn Allegheny responded.)
Under the deal in dispute, Highmark would acquire the health system and West Penn Allegheny would receive desperately needed cash.
Highmark began immediately to pour cash into the struggling system, which has continued to see its operations deteriorate since the deal was announced. West Penn Allegheny lost $87.8 million on operations between June 2011 and March 31, the most recent financial information available. That's compared with a $35.1 million loss for the same nine months the prior year.
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Analysts with Moody's Investors Service did not change the Caa1 bond rating for West Penn Allegheny Health System, the distressed Pittsburgh health system in line to be acquired by insurer Highmark.
That deal with Highmark—which includes $400 million in grants and loans for West Penn Allegheny and $75 million for medical education— likely saved the health system from restructuring and a possible default, said analysts.
It may also not be enough, apparently.
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