West Penn Allegheny Health System’s operating loss grew to $112.5 million in its most recent financial year, more than double that of the previous year, causing experts to question how much longer the nonprofit system can stave off creditors.
The struggling five-hospital system likely would have defaulted on its agreement with bond investors if Highmark Inc. had not given it $58 million, recorded as a donation during the year ended June 30.
“Without Highmark, they would be way in default,” said Stephen Foreman, associate professor of health care administration at Robert Morris University.
Financial help from Highmark is on hold. West Penn Allegheny accused the insurer on Sept. 28 of breaking their year-old merger agreement by demanding a structured bankruptcy to reduce nearly $1 billion in bond and pension debt. Highmark sued the hospital system on Oct. 1 to keep it from pursuing other deals.
West Penn Allegheny officials, who declined to comment, have said they believe they have options other than bankruptcy, such as other buyers.
Yet at the rate West Penn Allegheny is bleeding cash, Foreman predicted creditors will come knocking in six months or less.
“I just don’t see how they can stay away from a trigger here,” he said.
The trigger is one of two covenants the hospital system has with investors who hold about $750 million in bond debt. The covenants require it to have at least 35 days’ cash on hand and to maintain its “debt-service coverage ratio” at 1.1 or better. As of June 30, West Penn Allegheny had 62 days’ cash and a ratio of 1.16.
“Trust me, less than 2 is bad,” Foreman said of the ratio. “There’s no way they’re going to get the debt service covered” without financial help.
If the health system triggers one or both of the covenants, the bondholders require an independent financial adviser to recommend ways to cut costs and raise revenue. West Penn Allegheny, which has lost money for five years, hired a string of consultants over the years.
“I don’t know what good another consultant would do right now,” Foreman said.
Once cash on hand drops to 20 days or fewer, the health system defaults — allowing bondholders to accelerate payment of bonds and likely forcing bankruptcy.
West Penn Allegheny is trying to quit its $475 million deal with Highmark because it says the insurance company tried to force bankruptcy to reduce its bond debt and eliminate pension obligations totaling about $250 million.
Highmark, which intends for West Penn to be the centerpiece of a $1 billion health care provider organization, denies breaching their deal. A hearing on Highmark’s lawsuit in Allegheny County court, which started last week, is expected to conclude on Thursday.
Highmark executives testified that West Penn Allegheny’s financial position worsened more than expected, requiring the insurer to provide $33 million in April to keep it from triggering bond covenants.
“We remain firmly committed to an affiliation,” Highmark spokesman Aaron Billger said.
West Penn Allegheny’s financial results worsened because of declining patient volume and an increasing number of patients who did not pay medical bills, according to its financial report released Monday.
The $112.5 million loss from operations reflects performance of its hospitals, doctor groups and other medical services. After adding in investment income and donations, the system’s net loss was $37.8 million. That compares with an operating loss of $51.8 million the year before and net income of $20.4 million, achieved with a $50 million grant from Highmark in June 2011.
A 6.4 percent decrease in patients caused revenue to fall to $1.56 billion from $1.60 billion. Bad patient debt increased 17 percent to $80.8 million.
All three credit rating agencies take a negative view of West Penn Allegheny. Fitch Ratings last week downgraded the system further into junk-bond status. Moody’s and Standard & Poor’s are considering downgrades.
Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or [email protected].