Mar­ket tur­moil stresses hos­pi­tals

Mar­ket’s volatil­ity catch hos­pi­tals as quar­ter ends

Modern Healthcare - - FRONT PAGE - Melanie Evans

As sum­mer turned to fall, trou­bled in­vestors pushed stock mar­kets into a slide punc­tu­ated with wild swings and with un­for­tu­nate tim­ing for some hos­pi­tals and health sys­tems. Their bal­ance sheets cap­tured one of the low points of the volatil­ity for the quar­ter or fis­cal year that ended Sept. 30—a day the Dow Jones In­dus­trial Av­er­age dropped by more than 200 points for the 10th time in three months. Signs of the mar­ket tur­moil can be seen in sharply lower prof­its or net losses as hos­pi­tals and health sys­tems be­gin to re­lease unau­dited fi­nan­cial state­ments.

That was the case with Kaiser Perme­nente’s $45 mil­lion net loss for the third quar­ter. Sen­tara Health­care, based in Nor­folk, Va., fin­ished the nine months that ended in Septem­ber with net prof­its down by roughly $100 mil­lion from the same pe­riod the prior year. “They are ugly months,” said Robert Broer­mann, chief fi­nan­cial of­fi­cer of Sen­tara.

For health­care bor­row­ers that rely on in­vest­ment port­fo­lio cash to stay on good terms with lenders, mar­ket swings have added stress to bal­ance sheets as the weak econ­omy and fed­eral fis­cal woes have strained op­er­a­tions.

The tu­mul­tuous pe­riod in­cluded the 634point drop to the DJIA fol­low­ing Stan­dard & Poor’s down­grade of U.S. debt, af­ter the presi- dent and Congress failed to reach a deficit deal. The volatil­ity con­tin­ued last week as mar­kets sank on news that a Con­gres­sional com­mit­tee failed to meet its dead­line to pro­pose $1.2 tril­lion in deficit cuts (see re­lated story, p. 6).

Sen­tara, which owns eight hos­pi­tals, closed its books on the nine months ended in Septem­ber with net gains of $101.2 mil­lion, com­pared with $202 mil­lion the prior year. In­vest­ment losses to­taled $34.8 mil­lion through the end of Septem­ber. Last year, in­vest­ment in­come to­taled $74 mil­lion for the same nine months.

None­the­less, Sen­tara has suf­fi­cient op­er­a­tions and ac­cess to cap­i­tal to ride out mar­ket swings with­out jeop­ar­diz­ing its op­er­a­tions or cap­i­tal projects, Broer­mann said. “No one likes see­ing the neg­a­tive numbers, and you cer­tainly pay at­ten­tion, but if you have a di­ver­si­fied port­fo­lio and the cap­i­tal struc­ture is ap­pro­pri­ate, it shouldn’t dis­rupt the op­er­at­ing and cap­i­tal plans.”

Hos­pi­tals un­able to with­stand short-term mar­ket losses for the long-term eq­uity re­turns “have no busi­ness” in such in­vest­ments, Broer­mann said. He did, how­ever, of­fer one stip­u­la­tion: The strat­egy to ride out mar­ket volatil­ity ap­plies to mar­kets that re­bound. “If five bad months be­come 45 bad months, that’s an­other story,” he said.

Broer­mann said the sys­tem’s op­er­a­tions and cap­i­tal plans do in­clude in­vest­ment re­turns, but only so much as the pro­jected re­turns fac­tor into the over­all op­er­at­ing environment, which for hos­pi­tals ap­pears weak as the econ­omy con­tin­ues to strug­gle and state and fed­eral law­mak­ers look to curb health­care spend­ing.

That uncer­tainty sti­fles in­vest­ments as hos­pi­tals seek to bol­ster bal­ance sheets and cash by curb­ing spend­ing, said Ed­die Mar­mouget, a national part­ner with the ac­count­ing and con­sult­ing com­pany BKD.

Hos­pi­tals have moved to shel­ter more cash from mar­ket volatil­ity af­ter mar­kets plunged in late 2008 and early 2009, Mar­mouget said. He stressed that mar­kets fell much far­ther dur­ing the credit cri­sis. The Dow Jones In­dus­trial Av­er­age reached a 12-year low March 9, 2009. “Ev­ery­where you look, there is so much uncer­tainty,” Mar­mouget said, so hos­pi­tals have fo­cused on strength­en­ing bal­ance sheets with more con­ser­va­tive in­vest­ments.

In Ari­zona, Ban­ner Health lost $65.5 mil­lion on in­vest­ments in the first nine months of the year, com­pared with a $136.5 mil­lion gain for the same pe­riod in 2010 “ow­ing to a pretty dis­mal Septem­ber,” Dennis Dahlen, the Phoenix, Ariz.-based health sys­tem’s CFO, said on an in­vestor call in mid-novem­ber.

The sys­tem, which in­cludes 22 hos­pi­tals, ended the nine months with $247.6 mil­lion in op­er­at­ing gains, but Ban­ner Health’s net mar­gin was -1.7% thanks to its in­vest­ment losses and poorly per­form­ing in­ter­est swaps.

Kaiser Per­ma­nente, a 30-hos­pi­tal sys­tem based in Oak­land, Calif., re­ported a non­op­er­at­ing loss of $365 mil­lion for its third quar­ter and a net loss of $45 mil­lion. “Due to the fluc­tu­a­tion in the mar­ket and the tim­ing of the quar­ter end, we re­al­ized a loss in both non­op­er­at­ing in­come and net in­come for the quar­ter, although our per­for­mance is pos­i­tive for the year to date,” Kaiser Per­ma­nente spokesman Robert Gar­cia said.

For hos­pi­tals and sys­tems that will close their books in De­cem­ber—such as Sen­tara, Ban­ner and Kaiser—septem­ber’s dour mar­kets dragged down per­for­mance as the year nears a close. But for oth­ers, Sept. 30 marks the end of the fis­cal year.

Cox­health, based in Spring­field, Mo., closed its books in Septem­ber with op­er­at­ing in­come up 130% but net in­come down 40%. A spokes­woman for Cox­health de­clined an in­ter­view re­quest.

The two-hos­pi­tal sys­tem’s in­vest­ment re­turns dropped by 78% to slightly more than $1 mil­lion. Mean­while, Cox­health re­ported un­re­al­ized losses—the loss if the sys­tem cashed out its port­fo­lio and dropped any in­ter­est rate hedges—of $7.5 mil­lion com­pared with a profit of $7 mil­lion for the prior year.

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