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September 08, 2017 01:00 AM

UPMC hit with bond downgrade on PinnacleHealth integration risk

Dave Barkholz
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    The UPMC health system's debt was downgraded this week by Moody's Investors Service, citing concerns over how swiftly it can absorb newly acquired PinnacleHealth System.

    Moody's dropped UPMC one notch to A1 from Aa3 and assigned the still-solid rating a negative outlook.

    The recent acquisition of seven-hospital PinnacleHealth takes UPMC into the tough central Pennsylvania market for the first time, where it faces a host of new competitors, Moody's wrote.

    "That carries its own competitive challenges given the presence of sizable providers who are consolidating, as well as the lackluster economy of the local service area," Moody's noted.

    Until the merger, PinnacleHealth was based in Harrisburg, Pa.

    UPMC responded Friday by saying it has a history of integrating acquisitions and strong operations that include a large health plan.

    "Rating agencies tend to value stability rather than the kinds of growth strategies being pursued by UPMC," the health system said in a statement. "While Moody's A1 rating reflects a concern about execution risks, UPMC has a long track record of successfully integrating hospital systems and improving care in the communities we serve across the state."

    With PinnacleHealth, UPMC owns more than 27 hospitals, with fiscal 2017 revenue of $14.3 billion, including a 3.2 million-member health plan. It is the largest health system in Pennsylvania.

    The Moody's downgrade affects about $2.9 billion of UPMC debt.

    Moody's said the PinnacleHealth integration is complicated by that system's acquisition of four for-profit hospitals right before the UPMC deal was negotiated.

    PinnacleHealth snagged four hospitals from Community Health Systems in July, funding the acquisition with a $275 million loan from Wells Fargo Bank. The hospitals added about $434 million in revenue to the $1 billion in revenue PinnacleHealth posted in 2016.

    In fiscal 2017, UPMC's operating income slipped to $240.4 million compared with $310.1 million in fiscal 2016.

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