Hospital industry struggling with the credit scarcity
15 10 08 - 12:32
Disappearing Credit Forces Hospitals to Delay Improvements
By REED ABELSON
In late August, even before the credit squeeze reached a full state of crisis, a hospital system in Hawaii filed for bankruptcy reorganization after a lender failed to extend a loan for another month.
By September, a nonprofit hospital in Philadelphia found it could not borrow money through a traditional bond offering because the municipal bond market had come to a virtual halt.
And now, a hospital system in Minnesota says it plans to delay some new buildings, while another hospital group in Connecticut has decided to postpone the replacement of an emergency room. Other hospitals around the country say they are thinking about deferring the purchase of expensive new equipment like computer systems or multimillion-dollar M.R.I. machines.
The hospital industry, in other words, is among those struggling with the credit scarcity that the federal government’s latest financial bailout plan is meant to alleviate. And lending relief, if it comes, cannot come too soon.
Hospitals “are not immune,” said Richard L. Clarke, chief executive of the Healthcare Financial Management Association, a professional group for hospital finance executives. He noted that hospitals, like any other business, relied on credit for building projects and to maintain overall liquidity.
Tight credit is adding to a financial challenge that some hospitals are already facing, as greater numbers of patients are unable to afford the rising out-of-pocket portions of their medical bills or lack insurance altogether. Many hospitals say they are already seeing an increase in their bad debt — money they bill patients for but cannot collect.
And that problem could get worse, as people worry first about paying their mortgages and credit card bills before dealing with their medical bills, said Gary Taylor, a hospital analyst at Citi Investment Research. “We’re worrying about collection rates falling,” he said.
Despite the stereotypical notion of health care as recession-proof, hospitals worry that if the financial crisis leads to a severe economic downturn, they will feel deep pain. Many are already cutting budgets.
And that hunkering down by hospitals could have a ripple effect on suppliers of medical equipment like General Electric and Siemens, not to mention the construction industry, analysts say. The labor market could take a hit, too. As major employers, hospitals had been among the bright spots in the country’s job statistics, but their hiring is also starting to slow.
For hospitals, the current financial environment stands in stark contrast to the recent past. After years of heavy capital spending on new and improved equipment and buildings, outlays that were driven by easy access to credit from banks and bond markets, many hospitals have scaled back their ambitions as they scramble to protect their cash positions.
“Suddenly, the rug is getting yanked out from under them,” said Patrick Smyth, a consultant at Kurt Salmon Associates, which advises hospitals.
Even hospitals that traditionally have been among the best capitalized and financially robust say they are rethinking their priorities and looking for ways to cut expenses.
“We need to focus on tightening our belt,” said Steven Glass, the chief financial officer for the Cleveland Clinic, the Ohio system that includes some community hospitals as well as its flagship medical center. The economy is particularly tough in northeast Ohio, where Mr. Glass says unemployment is now hovering around 7.5 percent.
Tight credit has left some hospitals with few options. Although some recent bankruptcies have involved hospitals that were struggling before the current credit crisis, Hawaii Medical Center said it was forced to file for Chapter 11 simply because it could not find the short-term credit it needed to keep paying its bills.
“Our suspicion is that we are caught up in this market,” said Salim Hasham, an executive with Hawaii Medical.
This year, the Hawaii center bought two hospitals and lined up a $12 million revolving line of credit from Siemens Financial Services, which it said was secured by accounts receivables — the money owed to the medical center from insurers and patients. Hawaii said it had been meeting the monthly interest payments of $40,000 or so on the loan, but in August, Siemens was unwilling to extend the credit any further.
The center had no choice other than to file for bankruptcy, Mr. Hasham said. “It gives us breathing room to get what we need done.”
Siemens said that it could not comment on its dealings with the Hawaii center, but that it “remains committed to being a stable financial partner in these unstable times.”
In Philadelphia, the Albert Einstein Healthcare Network considers itself lucky, according to its chief financial officer, Brian K. Derrick. It was able to get a one-year loan after failing to raise money in the kind of tax-exempt bond offering that not-for-profit hospitals frequently use.
The network needed the financing because, as part of the deal to spin itself off from another hospital system, Einstein initially had agreed to repay its share of the system’s overall debt. But despite its strong financials and an attractive interest rate of 6.02 percent, Einstein could not raise $90 million through a fixed-rate bond offering it planned in late September.
“It became obvious that week that nothing was selling,” Mr. Derrick said.
Because Einstein had already looked into alternate sources of financing, it was able to secure a one-year bank line of credit for $130 million on Sept. 30. The lead banker, as it happened, was Wachovia, whose own problems have since forced it to sell itself to Wells Fargo. Wachovia was able to line up a second bank to help on the deal, and the credit line has not been threatened, according to Mr. Derrick.
“The real challenge is we’re in a somewhat short-term situation here,” said Mr. Derrick, who said Einstein now had a year in which to find permanent financing.
Elsewhere, while the construction sites that have become familiar on so many hospital campuses remain active, many hospital executives and consultants say the building boom is likely to subside. “What you’re going to see is a big slowdown in capital expenditures,” said Russ Rudish, a health care consultant for Deloitte.
While many hospitals say they have no plans to abandon projects already under way, they are already deferring new ones.
In Minneapolis, for example, construction continues on a new 90-bed hospital, Maple Grove, that began in June 2007. “That’s fully funded,” said James M. Fox, the chief financial officer for Fairview Health Services, which is one of two hospitals that teamed on the $144 million project and jointly financed it through a tax-exempt bond offering, guaranteed by the two health systems. But Fairview has postponed two other building projects.
Hospitals are “trying to minimize the excess bricks and mortar,” Mr. Fox said. Fairview is also taking a close look at its operations, he said, to see if there are ways to increase cash flow by speeding up collections or reducing less profitable operations.
Hospitals also face the prospect of steep cuts in payments from the federal Medicare and state Medicaid programs. Connecticut, for example, recently projected a $300 million shortfall in the entire state budget, which is likely to impinge on its Medicaid program. “We see a number of clouds on the horizon,” said Robert G. Kiely, the chief executive of Middlesex Hospital in Connecticut. “This is a time to be prudent.” Middlesex has chosen to delay a new emergency room at one of his hospitals for at least a year and half.
Rush University Medical Center in Chicago just broke ground on a new 14-floor building, expected to cost about of $550 million. Rush plans to pay for it through a variety of sources, including $220 million of a $350 million bond offering the hospital system still hopes to initiate before the end of the year. Rush officials say that while they are committed to completing that project, others are much less certain. Higher interest on its existing debt is already costing the system more than $2 million more a year than before, said Catherine A. Jacobson, the chief financial officer for Rush, and the hospital is also taking a hit in its investment portfolio.
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