Moody’s re­quires more detailed explanations of liq­uid as­sets

An­a­lysts out­look un­cer­tain for hospi­tal bor­row­ers

Modern Healthcare - - News - Me­lanie Evans

Credit and eq­uity mar­ket gains in re­cent months may have re­stored health­care bor­rower fi­nances, but the sec­tor’s out­look re­mains shaky. One ma­jor credit agency an­nounced last week that it would ex­pand its mea­sures of liq­uid­ity—money not tied up by donor re­stric­tions or longer-term in­vest­ments—for not-for-profit bor­row­ers. The height­ened fo­cus on liq­uid­ity comes af­ter large amounts of cash evap­o­rated from bal­ance sheets dur­ing the credit cri­sis and bank dis­tress left health­care bor­row­ers with the risk of pay­ing off some bonds very quickly.

Though less pop­u­lar since the cri­sis, bonds backed by banks— sold to short-term in­vestors able to exit deals quickly—still rank as one of many threats to hospi­tal bal­ance sheets and mar­gins as the econ­omy emerges from the worst down­turn since the Great De­pres­sion, an­a­lysts said in re­cent re­ports on the sec­tor’s out­look for 2010.

Health­care bor­row­ers face other pres­sures as well, an­a­lysts noted in re­ports on the sec­tor’s 2010 out­look. State Med­i­caid bud­gets are likely to be cut, while cap­i­tal spending slowed last year and hos­pi­tals face pent-up de­mand to in­vest in tech­nol­ogy, build­ings and equip­ment.

Not all news is dour. Some sys­tems have ben­e­fited from last year’s re­bound in tax- ex­empt credit mar­kets. Catholic Health East went to in­vestors last week for $412 mil­lion, mostly to re­fi­nance ex­ist­ing bonds at a lower in­ter­est rate.

As mar­kets im­proved in late 2009, the sys­tem moved to take ad­van­tage of ebbing in­ter­est rates, should the con­di­tions con­tinue into the new year, said Ran­dal Schultz, vice pres­i­dent and cap­i­tal strat­egy man­age­ment. They did. Fa­vor­able in­ter­est rates prompted the sys­tem to in­crease its bond by $14 mil­lion, he said. “We could re­fund more bonds than we orig­i­nally ex­pected,” Schultz said. Last week’s re­fi­nanc­ing should shave $27 mil­lion off the 23-hospi­tal sys­tem’s to­tal debt costs, he said.

Dur­ing the down­turn, hos­pi­tals suc­cess­fully cut costs to off­set lost rev­enue from fewer pa­tients and more un­paid bills, but whether hos­pi­tals can main­tain ex­ist­ing cuts or find new ways to curb costs is un­clear, Fitch Rat­ings noted in Fe­bru­ary.

Stan­dard & Poor’s an­a­lyst Martin Ar­rick, in a con­fer­ence call last week, said 2010 stands to of­fer the not-for-profit sec­tor a brief respite from the mar­ket and eco­nomic dis­tress of 2009 and loom­ing fis­cal and health pol­icy pres­sures in com­ing years. “But right now it is a lit­tle bit of an is­land of calm,” said Ar­rick, a manag­ing di­rec­tor for the rat­ings agency.

That calm may not last in the face of a con- tin­ued weak job mar­ket, Ar­rick said. One im­me­di­ate threat to hospi­tal op­er­a­tions are strug­gling state bud­gets and an end to ex­tra fed­eral aid for Med­i­caid—which states jointly fi­nance with the fed­eral gov­ern­ment—sched­uled for De­cem­ber, he said.

Hos­pi­tals face “one of the tough­est en­vi­ron­ments in decades,” Moody’s In­vestors Ser­vice an­a­lysts noted in Jan­uary. Se­vere state bud­get woes threaten to squeeze Med­i­caid spending. High un­em­ploy­ment has left fewer pri­vately in­sured and more pa­tients without ben­e­fits or de­pen­dent on pub­lic sub­si­dies for cov­er­age. Fed­eral aid for state Med­i­caid bud­gets will ex­pire in De­cem­ber and work­ers laid off af­ter March will no longer qual­ify for in­sur­ance sub­si­dies un­less Congress acts.

De­mand for Med­i­caid has surged, and states must bal­ance their bud­gets, which “have not bot­tomed yet” de­spite the over­all econ­omy’s ten­ta­tive re­cov­ery, the Na­tional As­so­ci­a­tion of State Bud­get Of­fi­cers said last month.

States squeezed $90 bil­lion from 2010 bud­gets, but that has failed to erase deficits, said a Fe­bru­ary sur­vey by the as­so­ci­a­tion and the Na­tional Gov­er­nors As­so­ci­a­tion. Rev­enue for 2010—which ends June 30 for all but four states—has fallen short of pro­jec­tions in 41 states, leav­ing an­other $19 bil­lion in gaps. States face an­other $55 bil­lion in gaps for the com­ing year, the sur­vey found.

Ar­rick echoed health pol­icy ex­perts and in­dus­try ex­ec­u­tives who have said state bud­get pres­sure could prompt cuts to Med­i­caid ben­e­fits, el­i­gi­bil­ity or re­im­burse­ment af­ter De­cem­ber, when fed­eral re­lief ex­pires.

Un­der the Amer­i­can Re­cov­ery and Rein­vest­ment Act of 2009, which pro­vided $87 bil­lion through the end of 2010 to aid Med­i­caid bud­gets, states that ac­cepted aid could not tighten el­i­gi­bil­ity or ben­e­fits for the safety net in­sur­ance.

Schultz: “We could re­fund more bonds than we ... ex­pected.”

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