Bill Payment An Ordeal For AmeriPath

Pathology services-provider AmeriPath's high bad debt expense is partly a result of its position as a secondary recipient of billing information, a factor in Moody's Investors Service's rating of the company's $365 million credit at B1. Unlike other laboratory companies, much of AmeriPath's revenue stems from an inpatient hospital setting, causing it to depend on the hospitals for billing data. Several other labs are able to send their bills directly to patients, which helps expedite and ensure payment at a reliable rate, explained Russell Pomerantz, v.p. and senior analyst at Moody's. The bank facility backs plans by Welsh, Carson, Anderson & Stowe to acquire the cancer diagnostics provider for about $845 million.

The rating further reflects the company's high leverage at a post transaction level of 5.2 times, with moderate coverage EBITDA-to-interest levels of 2.7 times. AmeriPath faces declining margins and escalating medical malpractice insurance costs. The company's acquisition strategy could also hinder its debt reduction efforts going forward, Moody's notes. Pomerantz explained that given the company's growth objectives, cash flow could be utilized for acquisition activity instead of debt reduction. However, "It does not necessarily mean that the company's credit profile will not continue to improve," he noted. AmeriPath is assembling $565 million in debt with a $65 million revolver, a $225 million "B" loan and $210 million in senior subordinated notes--rated B3 (see story, page 3).

Moody's recognizes that Riviera Beach, Fla.-based AmeriPath has strong demographic and industry trends, including large size with national and regional presence, greater resources, a sub-specialty focus and relationships with numerous hospitals. The company also has an experienced management team and a recent focus on systems integration, sales force expansion and efforts to build a stronger infrastructure. Strong organic growth further supports the company's demographic and industry muscle. "Overall, it's a decent company," Pomerantz noted. "If they operate as planned and everything is status quo we expect trends to be positive moving forward." A spokeswoman from AmeriPath declined to comment.