Health Sys. bond outlook drops

Citing "extreme financial difficulties" at a hospital that recently merged with the Penn Health System, Moody's Investor Services changed the outlook on the Health System's outstanding debt from stable to negative. A negative outlook means financial pressures are likely to increase in the coming months, according to Beth Wexler, a Moody's analyst. She emphasized that it does not necessarily foreshadow a downgrade in the rating of the Health System's debt. Such ratings reflect the institution's ability to pay off outstanding debt. The Health System retains an Aa3 bond rating for its $648 million in outstanding debt. Wexler termed the Aa3 rating "stellar" for the health care sector. By way of comparison, Jefferson Health System's debt carries an A1 rating, one level below that of the Penn Health System. Jefferson is Penn's primary competitor in the Philadelphia market. The change in outlook on UPHS debt followed Moody's downgrade of the rating on Pennsylvania Hospital's $167 million in debt. The Center City hospital -- Philadelphia's oldest, founded in 1751 -- recently merged with the Health System. Five straight years of losses and an 18.6 percent decrease in patient volume through the first three months of fiscal year 1998, which began July 1, are among the problems facing the hospital. Pennsylvania Hospital is expected to lose as much as $40 million during fiscal year 1998. Moody's also said the amount Pennsylvania Hospital has borrowed is unusually high when compared to the hospital's total value. One indicator of such ratios showed it would take 21 years to pay off outstanding debt using the hospital's available cash. A typical rating is between four and five years, and Wexler said 21 years is a length that "really makes you wonder." But both Moody's and John Wynne, chief financial officer of the Health System, emphasized that the change in outlook is "short term," and results from Pennsylvania Hospital's woes. Although the Health System has no financial stake in Pennsylvania Hospital, Moody's nonetheless said its problems will have an impact on the Health System. "Our feeling is that UPHS is devoting a significant amount of attention and resources to the trouble that Pennsylvania Hospital is experiencing," Wexler said. Wynne agreed that "there is human capital being spent trying to eliminate" Pennsylvania Hospital's deficit. "The burden is to try to get them to a break-even position," he said. According to Wynne, the Health System submitted a three-year plan for making Pennsylvania Hospital profitable to Moody's. Moody's cited these plans as a key factor in the decision not to further downgrade Pennsylvania Hospital's debt. Wynne said the debt rating for Pennsylvania Hospital may soon become a moot point. Before the end of the fiscal year in June, University Trustees are likely to refinance the Health System's existing debt and also add Pennsylvania Hospital's debt to the Health System's debt, he said. Moody's has already agreed to rate such a bond issue, including Pennsylvania Hospital's debt, at the Health System's current rating, Wynne said. He estimated such a refinancing could save Pennsylvania Hospital $4.5 million. Moody's was cautiously optimistic about Pennsylvania Hospital's future prospects. "Moody's believes? that management's plan, if implemented, could reverse the recent negative trend and restore a semblance of financial stability," the company said in a statement.