Opinion: Latest round of bad news show that 2024 remains crunch time for Penn Highlands

In May, we wrote here about how Penn Highlands Healthcare, a hospital network serving millions in western Pennsylvania, went from being modestly profitable a couple of years ago to facing an uncertain future today. We predicted that 2024 would be a make-or-break year for the health care network. Today, two months later, ongoing movement in the bond market, recent news stories and interactions with Penn Highlands’ executive leadership indicate that our prediction was accurate.

Our engagement with Penn Highlands began in February when they cut services, including labor and delivery, in Elk County. A group we belong to, mostly comprising business leaders from the area, sought to challenge these closures. Interactions with Penn Highlands’ executive leadership and subsequent research suggested then that the network quickly reduced health care options in its Elk County market to stabilize its financial position.

At the time, we wrote: “2023 was tough for Penn Highlands. In October, Fitch Ratings downgraded its outlook from stable to negative, indicating the investment-grade status of their bonds may be in jeopardy. Next, Penn Highlands reported an operating loss of $11.8 million for the quarter ending in December. So far, 2024 isn’t shaping up to be much better. A couple of weeks ago, S&P Global put Penn Highlands on a credit watch, stating: ‘There is at least a one-in-two likelihood of a negative rating action, possibly by multiple notches, given continually weakening unrestricted reserves and ongoing negative operating performance.’”

The bad news kept coming. Penn Highlands reported a $16.5 million operating loss for the quarter ending in March. In late May, Penn Highlands settled a lawsuit with the federal government for $750,000 for alleged Medicare and Medicaid kickbacks.

Then, on July 12, S&P Global lowered Penn Highlands’ bond ratings from A- to BBB – the lowest rating a bond can receive before it hits junk status. S&P Global maintains its credit watch on Penn Highlands, citing its weak financial reserves. This suggests further credit downgrades are possible, if not likely. Finally, and most concerning, Penn Highlands’ June 30, 2023 audited financial statements have still not been finalized. 

We reached out to Penn Highlands for comment on these matters. Additionally, on July 24, the regional board that oversees Penn Highlands Elk held their annual public meeting. We reiterated our questions during this meeting and several community members asked questions of their own.

Corinne G. Laboon, Penn Highlands’ system communication manager, did respond to our requests for comment – and did not dispute the conclusions we reached in May. When asked what the bond downgrade suggests about the financial stability of Penn Highlands, Laboon responded, “Most health systems across the country are facing difficult financial situations and Penn Highlands Healthcare is not any different.” To support her point, Laboon cited a Pittsburgh Post-Gazette article from July 24. It read, “Penn Highlands joins virtually every other health system in Western Pennsylvania reporting financial stress for the past year or so. Allegheny Health Network, Independence Health System and UPMC were among the other systems that had operational losses in 2023.” 

Penn Highlands’ operational losses may be similar to other health care providers in the region, but their simultaneously degrading bond rating and credit watch makes them an outlier. Recent analyses from the credit rating agencies show that Highmark Inc. (which includes AHN) had its A rating reaffirmed and its outlook remains stable. UPMC’s A rating held constant while its outlook was placed in either positive or stable status, depending on the credit rating agency. Only Independence Health System, which recently formed when Butler Health and Excela merged, has faced similar credit and outlook downgrades. Penn Highlands is not in good company.

The decision to cite reporting by the Post-Gazette is interesting for other reasons, because previous reporting by that paper gets to our core frustrations and concerns with Penn Highlands. 

In an article from May 30, the paper wrote that Penn Highlands and Allegheny Health Network both posted operational losses for the first quarter of 2024. However, AHN responded to a request for comment; Penn Highlands did not. We find their recent willingness to engage is an exception. Penn Highlands officials only stated they would respond to our questions after a crew from WTAJ captured on camera their commitment to do so during last week’s annual board meeting.

The May 30 article additionally stated, “Three consecutive years of operational losses at Highmark’s Health’s 14-hospital AHN subsidiary, which included two years when COVID-19 was raging, coincided with the reassignment or departure of eight executives in 2023, some with decades of experience.”

AHN is willing to replace its leadership team during a time of crisis. University Hospital in Cleveland reacted similarly to the current operating environment by reducing its C-suite level positions. Penn Highlands’ leadership team, meanwhile, is held unaccountable.

Further, comparing Penn Highlands to its more urban counterparts obfuscates its unique position in western Pennsylvania’s health care marketplace. Penn Highlands is often the largest employer and only health care provider in the rural communities it serves. This is why we, and many others, devote so much energy to this issue. If Penn Highlands goes under, it will pull entire communities down with it.

Lastly, Penn Highlands still has not provided a forthright reason why its June 30, 2023 audited financial statements have been delayed nor have they offered a timeline for their release. In response to our inquiry, Laboon wrote, “As a fiscal best practice, last year, Penn Highlands Healthcare issued a Request for Proposals (RFP) for an auditing firm. As a result of this process, KPMG was awarded the auditing services contract. We are working with them diligently to finalize Fiscal Year 2023 financials.”

This is unacceptable. Transitioning auditing firms should not result in a 13-month delay.

Laboon went on to state, “Penn Highlands Healthcare is confident that the audited financials will show marked improvement from year to year.” Similar guarantees have been offered before. Fitch Ratings noted in its October 2023 assessment that, “Management has articulated a performance improvement plan which shows PHH returning to profitability in fiscal 2024.” While we hope this is correct, management’s optimism remains unsupported by data. 

2024 remains crunch time for Penn Highlands. Our past accuracy only heightens our future concerns. The stakes are simply too high. If Penn Highlands cannot emerge from its financial morass, the lives and livelihoods of millions of Pennsylvanians may be in jeopardy. 

To change its trajectory, Penn Highlands needs to replace its executive leadership team. Regardless of the circumstances that led to this moment, the buck must stop with them. Next, the system’s new leadership needs to be proactive and get in front of bad news instead of indirectly relying on a coalition of business leaders and concerned citizens to bring damaging but crucial announcements to the public’s attention. Finally, Penn Highlands needs to put forth a turnaround plan for all to see and assess. Blind optimism and a “nothing to see here, folks!” approach no longer cut it.

Gary Anderson is a retired industry executive and currently a university faculty member with experience in operations, engineering and finance. Anderson resides in and is a native of Saint Marys, Pennsylvania.

Seth Higgins is a public sector consultant with experience in municipal and county government. A native of Saint Marys, Higgins currently resides in Philadelphia.