Finance: risky business
Credit markets eased and investment portfolios rebounded as 2009 progressed, but unemployment grew painfully worse and the weak economy threatens to further strain hospital operations in 2010, say healthcare finance chiefs and analysts.
Meanwhile, healthcare reform remains unsettled as industry executives begin the new year.
The hangover from the credit crisis continues to plague hospitals even as the cost of borrowing improved, and notably so in the final months of last year, insiders say. Healthcare borrowers—burned by debt market volatility in 2008 and continued uncertainty in 2009—will look this year for ways to minimize debt risk.
Other sources of risk—health reform and the economy’s strain on state and federal budgets—have prompted healthcare borrowers to more closely scrutinize and manage risks over which executives and governing boards have more control, such as debt portfolios, says David Cyganowski, managing director and healthcare investment banking co-head for Citigroup, a major underwriter of tax-exempt healthcare bonds.
Healthcare borrowers after the credit crisis are increasingly assessing balance sheets’ ability to withstand severe disruptions that prior to 2008 seemed unlikely, Cyganowski says. For some, that will mean more long-term debt with fixed interest rates and less variable-rate debt, which is sensitive to distress among banks that provide credit and liquidity guarantees for the bonds, he says.
Carolinas HealthCare’s Joseph Piemont, president and chief operating officer, says the system has tested budget scenarios that incorporate varying degrees of cuts to Medicaid, the safety net insurer jointly financed by state and federal tax dollars. Federal aid to buffer Medicaid from state cuts during the recession expires at the end of 2010. And health reform proposals appear likely to alter reimbursement, he says, which could affect revenue projections drafted to finance major long-term construction or capital projects.
Still, Piemont notes that healthcare borrowers face far less market volatility as they enter 2010 than they did as they entered 2009. “Visibility is not greatly improved,” Piemont says. “I do think the sense of panic is out of the market.”
Demand for elective healthcare declined and more patients were unable or unwilling to pay healthcare bills last year as the economy struggled. That trend is expected to continue or worsen, should Congress fail to prolong aid to help laid-off workers extend former employers’ health benefits, popularly known as COBRA. The downturn wiped out roughly 4 million jobs in the first 11 months of 2009 and has erased more than 7 million jobs since the recession began in December 2007.
Katherine Arbuckle, chief financial officer for Bon Secours Health System, Marriottsville, Md., says the 13-hospital system wrote off 4.5% of its bills as free and discounted care in 2009, up from 3.3% the prior year, an increase that mirrored rising unemployment rates.
Bon Secours closed its books at the end of August. Charity-care costs have so far slightly exceeded expectations this fiscal year despite projections that included a “modest increase” for such expenses, she says. If that trend holds, Bon Secours will be forced to make cuts elsewhere to offset the loss, Arbuckle says.
Arbuckle: Write-offs for care mirror the rise in unemployment.