Health System wins high national rank, loses financial status

Health System bonds were downgraded amid worries of the industry's financial health. It appears that Philadelphia's health care woes may have only just begun. Earlier this month, the cash-strapped Allegheny hospital system announced that it would declare bankruptcy and sell its nine Philadelphia area facilities -- once valued at $5 billion -- to the for-profit Vanguard Health Systems for $502 million. Though Allegheny's malaise has seemingly stabilized, the University of Pennsylvania Health System is now discovering that it is not immune to similar financial distress. Citing a projected operating loss of $100 million for Fiscal Year 1998, Moody's Investor Service -- the New York-based bond rating agency -- has downgraded the Health System's bond status, one of the key indicators of fiscal health. The $159 million in new bonds issued by the Health System to refinance its existing debt and begin more than $50 million in new capital projects will carry an A1 rating instead of the coveted Aa3 rating now held by UPHS. However, the new lower bond rating was assigned a "stable" outlook. Meanwhile, Standard & Poors, another New York bond rating agency, reaffirmed the Health System's AA rating, though it revised its outlook from "stable" to "negative." Health System spokesperson Lori Doyle downplayed the significance of the Moody's report. A lower bond rating makes it harder for an institution to raise capital by signaling an increased risk to investors, resulting in higher interest rates. "[A1] is still a very strong bond rating," Doyle said. "Our bond ratings are higher than any other academic medical center in the region." Moody's gives Temple University Hospital's debt a lower Baa1 rating, while Jefferson Health System -- Penn's primary competitor in the Philadelphia market -- carries an A1 rating, the same as the Penn Health System. However, Standard & Poors gives Jefferson an AA-minus rating, just below Penn's AA grade. Only a handful of health systems across the country currently have an Aa3 rating from Moody's. Moody's cited a number of factors in their decision to downgrade the Health System's bonds, including the financial effect of Penn's take-over of debt-ridden Pennsylvania Hospital -- known to doctors as "Pennsy" -- and larger structural problems in the health care industry. Pennsylvania Hospital's $50 million operating loss for 1998 represents fully half of the Health System's total $100 million deficit, while "recent significant volume losses have exacerbated PH's financial difficulties," Moody's report said. "The hospital's decision to align with UPHS, after a long-standing clinical affiliation with Thomas Jefferson University Hospital, alienated physicians who historically served on the medical staffs of both TJUH and Pennsylvania Hospital," the report continued. "As a result, these physicians moved practices and redirected patients to TJUH, which is evidenced by a 18.6% admission decline" for the first three months of Fiscal Year 1998. Doyle said that the Health System has an "aggressive plan" to reduce expenses and recruit new staff to Pennsy, and added that she expects a "positive turnaround" within two years. In addition to Pennsylvania Hospital and the Hospital of the University of Pennsylvania, the Health System includes Presbyterian Hospital at 39th and Market streets and Phoenixville Hospital in Phoenixville, Pa. Doyle emphasized that the report cites a number of industry trends for the decline of the Health System's financial situation and that the fault does not lie solely with Pennsy. The recently passed federal Balanced Budget Act is expected to cost the system $175 million in lost Medicare receipts over five years, while the hospital is expected to hand out more than $14 million this year alone in "charity care" to uninsured patients, Doyle said. Mark Pauly, a professor of Health Care Systems in the Wharton School, said that declining reimbursements for patient care are to blame for the industry's financial difficulties. "Insurance organizations that pay them -- Medicare, Medicaid and much more the managed care plans -- are becoming much more stingy in how much they pay the hospitals," he said. "HUP, along with the other teaching hospitals in town, treats a lot of these patients and they really can't turn them away." Though the Moody's report made no mention of the Allegheny bankruptcy, both Doyle and Pauly cited the recent collapse of Penn's competitor as a factor in the bond rating downgrade. "It's certain that there was some spillover," Pauly said. "Any hospital in the Philadelphia area is going to be tarnished by what's happening to Allegheny." Pauly added that the Penn Health System will not be severely hurt by this downgrading, noting that "it's more of a warning." "It's not going to be a serious problem for Penn -- yet," he said. "On the longer term, the outlook is quite bright. Penn has put a lot of emphasis on the quality of care [and] eventually that's going to win out."

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