UPMC plans to issue $130 million in new debt this week to support its capital spending plans but an ongoing dispute with insurer Highmark has cast a pall over its credit rating.
As the Pittsburgh-based health system posted its preliminary offering statement Friday, Moody's Investors Service revised the system's outlook to negative from stable. The credit rating agency cited the “unusually acrimonious environment” that has created a “period of transition” for the system.
UPMC has been trying to disentangle itself from Highmark ever since the insurer's 2013 acquisition of crosstown rival West Penn Allegheny Health System. Next week, the two parties will appear before the Pennsylvania Supreme Court for arguments in a case that will decide whether UPMC can terminate Highmark's Medicare Advantage contracts at the end of the year.
On a separate front, UPMC also is suing Highmark for $170,000 after alleging that the insurer reimbursed it below contracted rates for oncology services.
“From our perspective, the relationship with Highmark is over,” said Tal Heppenstall, the system's executive vice president and treasurer. “We're making significant progress in unwinding our relationship.”
Highmark accounted for 15% of UPMC's gross patient service revenue in fiscal 2015, down from 19% the previous fiscal year.
On an investor call to market the new bonds, UPMC executives tried to assure investors that it is continuing to grow in both its healthcare services and insurance divisions. UPMC reported 17.3% year over year growth in insurance enrollment in its fiscal 2015 earnings report.
Moreover, UPMC saw only a 1% decrease in admissions in fiscal 2015 even as the market for healthcare services has contracted in western Pennsylvania, said Robert DeMichiei, its chief financial officer. “We're generally staying flat in a shrinking market and as a result, our market share has grown,” he said.
The system's operating margin improved to 2.8% in fiscal 2015, up from the prior year's 1.7%.
UPMC has shown that it can successfully manage costs for insurance members in a narrow network plan, which will allow the system to compete on price, DeMichiei added. The system offered the second-lowest cost silver plan in the country on the state's health insurance exchange.
Pricing for the bonds is scheduled Thursday (PDF). The bonds are rated Aa3 by Moody's, A+ by Standard & Poor's and AA- by Fitch Ratings.
Standard & Poor's also lowered its outlook for UPMC to negative from stable last week, citing the system's "persistently very thin operating margins during the past three fiscal years." UPMC avoided a downgrade thanks to the system's position as the region's dominant provider and revenue from its large and growing health plan.
Fitch last week took the opposite tack from Moody's and revised the system's outlook to stable from negative. It cited the “slow but gradual shift” of Highmark enrollees into UPMC's health plan and other commercial insurance plans. And it added that system hasn't been adversely affected by competition from the newly-formed Allegheny Health Network.
UPMC kicked off its roadshow on the same day it received clearance to reopen its organ transplant program, which had been on hold for six days after three patients died of fungal infections. Federal and state regulators had sought to determine whether mold was at the source.
Asked about whether there could be litigation concerns, DeMichiei said the system hasn't seen any evidence of that yet. “I don't view this as anything material,” he added.
UPMC has a number of expansion plans underway, including a new pediatric outpatient center on the Erie, Pa., campus of UPMC Hamot Women's Hospital. It also is developing a cancer program with the Fundacion Cardiovascular de Colombia in the Colombian city of Piedecuesta.