The University of Pittsburgh Medical Center (UPMC) saw its credit rating downgraded by Moody’s Investor Service, along with maintaining a negative outlook on the system, citing its “accelerated expansion and high execution risk” with the acquisition of the seven-hospital PinnacleHealth System.
The downgrade from an Aa3 rating to A1 affects about $2.9 billion of debt at UPMC. Moody’s said the Pinnacle deal, first announced in March, has the effect of “compounding the degree of integration risk” UPMC is facing due to Pinnacle having acquired four Community Health Systems (CHS) hospitals shortly before the deal was announced. It will also bring UPMC into a new market in central Pennsylvania, a tough area due to established, consolidated providers as competitors and a “lackluster” local economy, according to Moody’s.
“We expect the modest performance to continue over the intermediate term as the system must gain efficiencies and spread the scale of its large operations into a new market,” Moody’s said. “Margins are also suppressed by the health plan which operates in a highly competitive environment.”
UPMC was already the eighth-largest health system in the U.S. before the merger by number of facilities managed or owned. It had planned on continuing its expansion with a $900 million capital budget for 2018, $235 million of which was to be dedicated a refinancing a Pinnacle loan for its purchase of hospitals from CHS.
In its response to the Moody’s downgrade, UPMC acknowledged its plans don’t align with what agencies like Moody’s want to see.
“Rating agencies tend to value stability rather than the kinds of growth strategies being pursued by UPMC,” the 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.”