UnitedHealth will cancel two-thirds of Team Health's in-network contracts over the next 11 months.
Team Health Holdings Inc.'s ongoing contract fight with UnitedHealth Group Inc. is hurting the bond status on the Knoxville-based hospital staffing and management company.
Moody's Investors Service on Friday downgraded the outlook for Team Health from stable to negative, after affirming the company's B3 Corporate Family Rating and B3-PD Probability of Default Rating.
"The change of outlook reflects rising uncertainty around Team Health's ability to reduce leverage given its recently disclosed dispute with UnitedHealth Group Inc., one of its largest commercial payors," Moody's said.
Moody's also affirmed the B2 rating on Team Health's senior secured credit facilities and Caa2 rating on its unsecured notes.
UnitedHealth told Team Health last month that it will cancel two-thirds of its in-network contracts with Team Health between October 2019 until July 2020.
UnitedHealth has also significantly reduced its payments to Team Health for out-of-network services, Moody's noted.
Team Health provided a statement to HealthLeaders suggesting that it is lawyering up in preparation for more litigation with UnitedHealth.
"As Team Health continues to see more aggressive and inappropriate behavior by payors to either reduce, delay, or deny payments, we have increased our investment in legal resources to address specific situations where we believe payor behavior is inappropriate or unlawful," the company said.
"To date, Team Health has been successful in getting reasonable reimbursements as a result of that litigation effort. Immediately following their most recent termination, United reached out to Team Health and we have begun negotiations," Team Health said.
The hospital company said that, so far in 2019, it has successfully resolved eight lawsuits and has filed another 13 lawsuits.
"As United continues to arbitrarily terminate contracts, we expect to file more lawsuits for unfair payment practices and unjust enrichment – and despite United's urgings we will not surprise bill patients to make up the difference," Team Health said.
While Moody's said it believes that Team Health and United will eventually reconcile, "modified contracts are likely to come with lower reimbursement rates for Team Health, which will reduce profitability."
"Further, a drawn-out negotiation process may lead to disruption to hospital customers and contract losses," Moody's said.
"While there is a range of potential outcomes for Team Health, the company's very high leverage raises the risk that even a modest reduction in profitability will significantly raise debt/EBITDA," Moody's said.
TeamHealth's pro forma debt to EBITDA was estimated by Moody's at approximately 8.2 times on June 30.
Moody's noted that the B3 rating is supported by Team Health's ability to generate positive cash flow of more than $100 million a year, and that the company's liquidity remains solid.
"The company has a sizable cash balance ($299.4 million as of 6/30/2019), near full availability of its $400 million revolver and no near-term debt maturities," Moody's said.
"The company has also shown early signs of progress in executing its business turnaround. This affords the company some flexibility to absorb a modest negative development with respect to contract negotiations with UnitedHealth," Moody's said.
Even with that, Moody's said, the reduced payments from UnitedHealth and potentially other insurers will create a "meaningful decline in free cash flow (that) will likely lead to a rating downgrade."
"Reduced free cash flow would not only limit the company's ability to repay debt, but also its ability to execute its tuck-in acquisition strategy," Moody's said.
“As United continues to arbitrarily terminate contracts, we expect to file more lawsuits for unfair payment practices and unjust enrichment – and despite United's urgings we will not surprise bill patients to make up the difference.”
John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.
Moody's Investors Service on Friday downgraded the outlook for Team Health from stable to negative.
UnitedHealth has also significantly reduced its payments to Team Health for out-of-network services.
Team Health has accused UnitedHealth of 'aggressive and inappropriate behavior.'