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Cheap Debt Over, But Bad Debt Hitting Stride

Phil Betbeze, for HealthLeaders News, July 30, 2007

Back in April when I was hosting a roundtable here in Nashville for the June issue of the magazine, my guests and I talked about predictions for when the era of cheap debt for hospitals would end. We all had our theories, but the one thing we could all agree on was that given the breakneck pace of borrowing--not only among municipal bondholders like hospitals, but also in the public markets--it couldn't last much longer. It seems like now we have our answer: The end of the era is pretty much now.

"Smart organizations are using this opportunity to either take on debt that will strengthen them strategically or refinancing to pare down debt so that when spreads widen again, they find themselves on the right side of the chasm," I wrote in my introduction to the piece. Well, if you didn't act to take on debt prior to a couple of weeks ago, looks like you got shut out of this party.

The era of tight spreads in the bond market that was squarely in place until recently helped spur a feeding frenzy among private equity companies that have taken public companies private at an unprecedented pace using the cheap leverage. Hospitals took advantage too, using the opportunity to borrow up at historically cheap prices. But as worries about subprime mortgage problems in residential real estate spilled over into the municipal debt market, spreads are widening and money is becoming more expensive to borrow for all but the most bulletproof AA-rated public entities.

At the same time, we hear more and more about the problems hospitals are having with bad debt. This is money that hospitals write off as uncollectible, and is largely attributed to the increase in the uninsured--people whose emergency treatment the hospitals must provide, and who largely can't pay the bill. But the number of uninsured has stayed relatively stable over the past few years--depending on whom you believe, somewhere between 40 million and 46 million. A huge number, no doubt, but probably not enough to square with the huge increase in bad debt hospitals have been shouldering lately. The recent trend of big increases in coinsurance and co-pays associated with high-deductible health plans is the more likely culprit.

Those who tout consumer-directed care as a solution to many of healthcare's quality problems might have one part of the equation right, but if hospitals are bankrupted in the process, what will have been achieved? Lifepoint Hospitals Inc., a public company headquartered here in Nashville, just reported earnings July 23. Second quarter income fell 61 percent versus a year ago, sending already battered shares down 15 percent immediately. Margins are tight at hospitals, so as a greater share of the responsibility for the bill falls on patients, hospitals must capture that revenue or suffer. Hospitals need a better way to make sure they're going to get paid for the relatively small but growing portion of hospital bills that patients are personally responsible for, or the whole system collapses under its own weight.

So the era of cheap debt seems over. But to the dismay of hospital finance types, the era of bad debt may just be hitting its stride.


Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.

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