Piedmont Healthcare’s expansion spurs downgrade in credit outlook
By David Pendered
Moody’s Investors Service has downgraded the credit outlook of Piedmont Healthcare in the wake of its acquisition of Athens Regional Medical Center. Analysts expressed concern over this part of Piedmont’s effort to hold or improve its position as the region’s second-largest health care provider, based on market share.
On the upside, Moody’s assigned an investment grade credit rating, Aa3, to the $406 million bond package Piedmont intends to sell as early as this week. Proceeds are to pay costs related to the acquisition of ARMC. Piedmont took control of ARMC’s parent company on Oct. 1, according to Moody’s credit opinion dated Oct. 14.
However, Moody’s downgraded Piedmont Healthcare’s credit outlook from stable to negative. The future doesn’t look bright. Analysts found two factors that could lead to a credit upgrade and five factors that could lead to a credit downgrade.
Piedmont got dinged for its 35 percent increase in debt related to the ARMC acquisition; challenges managing the doctors at ARMC; and future debt related to Piedmont’s two-part plan to invest $600 million at its flagship campus in Buckhead.
Piedmont intends to build a 16-floor tower with 114 beds, state records show. The first phase, at $450 million, is to be funded with a $300 million bond issue in 2019 and a $150 million fundraising effort now underway, according to Moody’s.
In addition to the debt situation, analysts cited the complexities of merging the Athens and Atlanta institutions. Issues include a group of doctors in Athens that isn’t expected to make it easy for Piedmont to improve the balance sheet of Athens Regional:
- “The physician community [in Athens] is highly independent and fragmented which we believe represents the greatest risk to achieving synergies and improving Athens’ financial results.”
Piedmont intends to finance the ARMC deal with bonds issued through authorities in three counties – $165 million through the Fulton County Development Authority; $176 million through the Clarke County Hospital Authority; and $65 million through the Fayette County Hospital Authority, according to Moody’s.
Piedmont provided the following statement Monday when asked to respond to Moody’s credit opinion:
- “We’re confident our recent partnership with Piedmont Athens Regional will strengthen our ability to provide high-quality, patient-centered care in Georgia. Piedmont has a history of successfully integrating hospitals into the system, expanding access to healthcare for patients while maintaining solid financial performance.
- “As the system grows, so does our need for additional space. Within six years, 45 percent of the current space at Piedmont Atlanta will exceed a typical life expectancy of 40 years. This, combined with ongoing inpatient capacity issues, is why construction of a new patient tower is slated to begin January 2017, pending Georgia Department of Community Health’s approval of Piedmont’s Certificate of Need application. Much of the project will be funded through philanthropic support. We are especially grateful to The Marcus Foundation and other donors stepping up to support our efforts to revitalize our campus.”
These are the high stakes on the table in metro Atlanta’s competitive health care market.
They speak to the reason Piedmont Healthcare and its related organizations paid its top executives salaries in 2015 that include $2.3 for President/CEO Kevin Brown; $2.27 million for Chief Transformation Officer Michele Molden; and $1.4 million for Sidney Kirschner, CEO of the Piedmont Heart Clinic, according to Piedmont’s 2014 tax returns, as provided by guidestar.org. Piedmont files as a tax-exempt organization.
Piedmont now ranks second in market share in metro Atlanta, according to Moody’s rating action.
Piedmont trails Wellstar Health System in market share, 15.4 percent to 22.1 percent. These figures include Wellstar’s acquisition last year of five hospitals from Tenet Healthcare Corp.
Moody’s analysts paused to make the point that both institutions benefit from Grady Health System. That’s because Grady handles much of the region’s Medicare and indigent volumes. These patients pay less for services received than private insured patients, or not at all.
To grow its market share, Piedmont’s board of directors has been implementing a two-pronged approach.
Piedmont has been buying smaller hospitals, such as in Athens and Newton County, over the past 20 years. Piedmont itself is about to undergo a major expansion, pending state approval.
Piedmont intends to build a 16-floor tower at its flagship campus on Peachtree Road. The project is to provide the addition of 114 short-stay inpatient beds, according to state records.
The tower represents a $603 million investment. The deadline for the state’s response is Dec. 12, according to the Department of Community Health’s Tracking and Appeals Report.
Piedmont is a seven-hospital teritiary care healthcare system that Moody’s says is comprised of:
- Piedmont Atlanta Hospital, 529 beds;
- Piedmont Fayette Hospital, in Fayetteville, 221 beds;
- Piedmont Mountainside Hospital in Jasper, 52 beds;
- Piedmont Newnan Hospital, in Newnan, 136 beds;
- Piedmont Henry Hospital, in Stockbridge, 215 beds;
- Piedmont Newton Hospital, in Covington, 97 beds;
- Piedmont Athens, in Athens, 359 beds;
- Piedmont Medical Care Corporation, a multi-specialty physician practice;
- Piedmont Heart Institute, an integrated cardiovascular practice.