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UPMC issuing $400 million in bonds to fund ongoing projects

UPMC plans to sell $400 million in two series of fixed-rate bonds that will refinance existing debt and provide $150 million in new capital. Pricing is expected Wednesday and the offering will close Oct. 1.

The Pittsburgh-based system's total debt load will remain steady at $3.1 billion as some of the system's older debt matures.

In an investor presentation, Robert DeMichiei, the system's chief financial officer, said UPMC is projecting $450 million in capital expenditures (PDF) in its fiscal 2015. The bonds will help fund ongoing projects. Its focus remains on outpatient centers, technology upgrades and communities in its western Pennsylvania market that offer a strong return on investment, he said.

Asked about its M&A plans, DeMichiei said the system is continually looking at ways to work more closely with nearby hospitals, though not necessarily through formal affiliations. UPMC also has made physician practice acquisitions, including in adjacent New York State, which could continue. “We’d be looking for areas that are co-located or ancillary to where our strength is, which is western Pennsylvania,” he said.

A big unknown for UPMC is what will happen when its contract with health insurance giant Highmark is allowed to expire on Jan. 1. UPMC had fought to end the contract in the aftermath of Highmark’s acquisition of West Penn Allegheny Health System to create one of the country’s largest integrated delivery networks.

Despite Highmark’s objections, a June compromise will allow six of UPMC’s hospitals to be out of network while seven will be in-network. Highmark members also will have access to certain specialists and current patients can continue care at in-network rates.

Moody’s Investors Service assigned an Aa3 rating to the new bonds, citing the potential loss of patients.

Highmark members accounted for 19% of UPMC’s revenue in fiscal 2014, a 2 percentage point decline year over year. Yet Tal Heppenstall, the system’s treasurer, said UPMC does not foresee a significant shift in its commercial market. Many local employers are offering UPMC’s own health plan among next year’s insurance options, or are including another commercial plan that has in-network agreements with UPMC, he added.

On the government side, its health plan is a significant player in the Medicare managed-care market and the system is bullish on the recently announced Medicaid expansion in the state, DeMichiei added.

UPMC ended its fiscal 2014 with an operating surplus of $190 million on $11.4 billion in revenue, compared with a surplus of $132 million on revenue of $10.2 billion in fiscal 2013. Admissions increased 8% and health plan membership grew 9%.

Follow Beth Kutscher on Twitter: @MHbkutscher



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