S&P: University Of Pittsburgh Medical Center Outlook Revised To Stable From Negative On Improved Operating Performance
"The outlook revision reflects our view of UPMC's improved operating performance in fiscal 2016, which we expect will continue in 2017," said S&P Global Ratings analyst Cynthia Keller. "Although margins, debt service coverage, and some balance sheet metrics remain thin for the rating level, we believe UPMC's extremely strong enterprise profile and stable balance sheet support the 'A+' rating at this time." More specifically, UPMC maintains a dominant provider presence in Western Pennsylvania with significant size and revenue diversity, including a large and growing health plan, and UPMC also serves as the teaching hospital for the University of Pittsburgh. We believe the strength of the enterprise profile provides UPMC with an effective cushion for lower than median level financial metrics although we would not want to see any long term sustained weakening of the financial profile below current levels.
"However, we recognize that the health care environment in Western Pennsylvania is transforming as UPMC and its main competitor--Highmark and the Allegheny Health Network--work through the separation of their business relationships and so we expect there will be some short-term volatility in business position and financial performance," added Ms. Keller. "We view positively UPMC's efforts to diversify its provider and insurance businesses." We believe UPMC's accelerated and sizable investment in innovation and development presents opportunities for further diversification and returns beyond success from the initial public offering of Evolent Health, although we also recognize that these investments are equally as likely to be dilutive in any given year.
The 'A+' rating is based on our view of UPMC's group credit profile and the obligated group's core status. Accordingly, the bonds are rated at the same level as the group credit profile.
The stable outlook reflects UPMC's excellent enterprise characteristics, which provides some cushion for the below median level financial performance. However, we believe that maintenance of the 'A+' rating during the two years covered by our outlook period will require continued positive operating performance and on-going stability of unrestricted reserves relative to debt levels.
We could consider a lower rating if operating margins and cash flow are persistently negative as debt service coverage is just adequate for the rating level and already heavily reliant on nonoperating revenue, which can be volatile. Although not expected, a higher-than-usual debt increase or depletion of unrestricted reserves could also result in a rating action.
We believe there is little upside to the current rating given UPMC's comparatively weaker financial metrics for the rating level. However, we would consider a positive outlook with a trend of positive operating margins that generate over 3x debt service coverage and improved days' cash on hand to around 150. In addition, while UPMC performed well in fiscal 2015 following the expiration of many contracts with Highmark, we would want to observe continued stability during the next phases of the relationship's evolution as well as through the initial implementation phases of UPMC's new Medicaid contract with Pennsylvania.
UPMC's system includes 21 domestic hospitals, over 3,000 employed faculty and community physicians, various insurance and related products with 3 million enrollees, international operations, over 500 outpatient sites, and a growing emphasis on entrepreneurial business development.