Commentary: It’s make-or-break time for Penn Highlands Healthcare

One of the commonwealth’s key health systems faces an uncertain prognosis.

Douglas Sacha

Two years ago, Penn Highlands Healthcare was a modestly profitable hospital network that served millions of Pennsylvanians in its 26-county service area. Today, recent cuts in services, coupled with signals from the bond market, suggest Penn Highlands is in dire financial straits, making 2024 a make-or-break year.

We reached this conclusion through strained communication efforts with Penn Highlands’ executives, open-source research, and numerous conversations with health care and public officials. What prompted this flurry of activity was Penn Highlands’ February announcement that it would be cutting services in Elk County. Since then, community members have stridently advocated for Penn Highlands to change course, to no avail.

We suspect their recalcitrance is because these decisions are being driven by economic factors facing health care generally, but Penn Highlands acutely. In private and public meetings, Penn Highlands executives insist that other circumstances, such as patient safety and recruitment challenges, precipitated these decisions. But the data tell a different story.

In October 2022, Penn Highlands said it would be profitable in two years. This prediction was reiterated last year. However, 2023 was tough for Penn Highlands. In October, Fitch Rating 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.”

To further complicate our attempts to gain a clear picture, Penn Highlands’ June 30, 2023, audited financial statements are delayed because the company is switching its auditing firm. The reason for the change has not been made readily available.

Other data reveal a weakening financial position. Cash-on-hand declined from approximately 150 days to an estimated 90 days in 2024. The debt-to-asset ratio is about 104%, with total debt of around $361 million. Gross receivables were added to debt security in 2023. Simply put, cash reserves are dwindling while debt exceeds the value of their assets. Comments made in mid-April by Penn Highlands CEO Steve Fontaine in front of a group of industry leaders in Elk County did not signal confidence. When questioned about this year’s profitability, he simply said the board of directors is aware of the health network’s issues. He refused to elaborate.

Penn Highlands’ future depends on its ability to improve its cash position, increase revenue, or decrease operating expenses. Failure to do so could result in additional service reductions, further eroding the health care options for Pennsylvanians, particularly those in the rural northern and central regions.

Some analysts point to the recent acquisition of the Mon Valley Hospital in 2021 and the ongoing construction of a micro-hospital in Centre County as part of the reason for Penn Highlands’ situation. Analysts predict Penn Highlands will exit this spiral if these investments provide a return soon. Yet no evidence has been presented to justify this optimism. Mon Valley Hospital lost approximately $13 million last year, and the Centre County micro-hospital is likely over budget. We are simply left with no choice but to trust the leadership of an organization that is elusive in its public comments.

The available information presents a bleak picture. We hope we are wrong, and if we are, we expect Penn Highlands to come forward with data to explicitly counter these conclusions. But with each passing quarter, the mounting losses move in tandem with residents’ decreasing confidence. If Penn Highlands is indeed struggling financially, they need to say so now so western Pennsylvanians can prepare.

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.