West Penn Allegheny Health System's credit rating downgraded

| Saturday, Dec. 24, 2011

West Penn Allegheny Health System's credit rating was downgraded on Friday by Fitch Ratings because of a "significant deterioration in operating performance" at the struggling five-hospital network.

Fitch's downgrade, to "highly speculative" from "speculative," on the health system's $750 million in bond debt follows a downgrade last month by Moody's Investor Service and no change by Standard & Poor's Rating Service.

West Penn Allegheny, the No. 2 hospital system in Pittsburgh, has agreed to be acquired by Highmark Inc., the state's largest health insurance company, for $475 million. The deal, which could take a year to be approved by state regulators and others, is expected to help the financially troubled health system, Fitch said.

In the near term, its financial losses are accelerating, "primarily driven by a drop in volume and physician losses," Fitch said. "A 15 percent decline in discharges in 2011 was to a large degree caused by loss of physicians as the system reorganized and consolidated several of its inpatient services among its urban hospitals."

Since then, with the backing of Highmark, the system has announced it will reopen the emergency department at West Penn Hospital in Bloomfield and invest in other improvements at the hospital and at Forbes Regional Hospital in Monroeville.

"We are disappointed in Fitch's decision to downgrade West Penn Allegheny Health System's bond rating," West Penn Allegheny said in a statement yesterday. "However, we share their forward-looking view that WPAHS' affiliation with Highmark is a positive development that should yield benefits for both organizations."

A "highly speculative" rating means the health system is meeting its financial commitments, Fitch said, but the "capacity for continued payment is vulnerable to deterioration in the business and economic environment."

For the year ended June 30, West Penn Allegheny reported an operating loss of more than $50 million. And in the July-September period this year, the hospital system reported an operating loss of $27 million.

Highmark's proposed acquisition of West Penn Allegheny led UPMC, the region's dominant hospital system, to end negotiations with Highmark on new reimbursement contracts. Highmark and UPMC on Thursday said existing contracts, which set discounted in-network rates Highmark pays for its members to receive treatment by UPMC, will be extended to June 30, 2013.

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