The slipping bond ratings of several hospitals owned by Allegheny Health, Education and Research Foundation offer a rare glimpse at the price hospital networks pay to finance acquisitions and later to prop up their weak sisters.
Early this month, Standard & Poor's, a New York-based bond-rating agency, downgraded bonds for AHERF's flagship Allegheny General Hospital in Pittsburgh to A- from A+. While still investment quality, Allegheny General's lower bond rating will increase its cost of borrowing.
Triggering the downgrade, Standard & Poor's said, were unaudited operating losses of about $8.6 million at 559-bed Allegheny General and large cash transfers to affiliated companies, particularly physician practices. During the year ended June 30, Allegheny General transferred $34 million in assets, mostly cash, to support physician practices. An additional $15 million went to subsidize research, Standard & Poor's said.
Pittsburgh-based AHERF has 17 hospitals stretching from Ohio to New Jersey, and it has been an aggressive acquirer of physician practices.
Standard & Poor's issued a separate downgrade on bonds for part of AHERF's Graduate Health System in Philadelphia. Standard & Poor's downgraded bonds for hospitals known as Centennial Group, which includes 198-bed Graduate Hospital; 183-bed Mount Sinai Hospital, which closed in October; 165-bed Parkview Hospital and 195-bed City Avenue Hospital.
All four hospitals had negative cash flow from operations, according to Standard & Poor's, and unless things improve dramatically the rest of this fiscal year, the three remaining hospitals will be unable to meet debt payments.
For the first quarter of fiscal 1998, the Centennial group lost $8.9 million (excluding Mount Sinai), according to unaudited financial statements reviewed by Standard & Poor's. During the same quarter, AHERF pumped $17.6 million into the ailing group to meet cash flow needs.
Dramatic financial deterioration and the likelihood of continued poor performance led Standard & Poor's to cut ratings for Centennial Group to BB from BBB+, dropping the bonds below investment grade.
Operations, however, may be ready to rebound. "My sense is that they have bottomed out," said Gerald Katz, a healthcare consultant in Philadelphia. "This big round of layoffs and belt-tightening is part of this bottoming-out phenomenon." In October AHERF laid off 1,200 employees at its Philadelphia hospitals (Oct. 20, p. 2).
Even an operational turnaround won't do much to lift the hospitals' heavy debt burden in the short term. The hospitals owe almost $117 million to affiliates, according to Standard & Poor's, and that figure is increasing.
"They're in a big hole," said David Peknay at Standard & Poor's. "And probably if they weren't part of AHERF, these ratings would be lower."
AHERF executives were unavailable for comment.