Hospitals Struggle to Acquire Credit, Face Unpredictable Market

The worsening financial crisis is having a range of effects on U.S. hospitals and health systems. One immediate consequence of the economic downturn has been a near total resistance among banks to loan money.

• Companies and organizations of all sizes are having difficulty securing the short-term credit needed to fund day-to-day operations
• Hospitals with less-than-perfect bond ratings are finding it extremely difficult to float new bonds

Municipal bonds are often used by hospitals to fund a range of activity, from the purchase of capital equipment to the funding of structure expansions or renovations. Even those hospitals that are able to issue new bonds are finding that high or volatile interest rates are making repayment prospects difficult. A report in April by Wachovia Capital Markets details that acute care capital expenditures over $1 million would be delayed and that money for new information technology systems or construction projects are likely to be canceled.

In addition to credit issues, bond markets are fluctuating greatly in short periods of time, making it difficult for hospitals to borrow at reasonable rates.

In March, some bonds for hospitals in Wisconsin had interest rates as high as 18 percent.  Variable interest bonds held by The Henry Ford Health System saw an increase from 2% to 7.9% and back down to 5.7% within roughly a month’s time in early October. Some health systems have stated that they will buy back debt if investors get nervous in order to get bonds issued. Two dozen health systems rated by Moody’s have agreed to such, which could amount to a buy-back of $8.4 billion if investors decide not to hold the bonds.

Conclusions

• Hospitals access to capital is limited, especially if they have poor financial ratings.
• Bond markets are extremely volatile and result in hospitals unable to project for future purchases and projects.
• Hospitals are highly susceptible to further market downturn and at some at the mercy of investors’ decisions.