Healthcare, Meet the Great Deleveraging

Debt is a proverbial four-letter word these days, and not just because it actually has four letters.

After years of easy money and low interest rates, the worm has turned—and quickly. Where once hospitals of all stripes had an easy time offering debt through the municipal markets, now only the highest-rated hospitals—that is, those that make a margin—can effectively sell a debt offering. Those on the lower end of the totem pole are largely out of luck. And forget about bank loans. It only seems like those guys aren't lending to anyone these days. Debt is available but only at extremely high interest rates, by recent historical standards.

I'm not sure who coined this term, but many have called the recent credit crisis the Great Deleveraging. I like the term because it effectively describes the aftermath of what ails the economy—a debt binge across all economic sectors the likes of which we have never seen. The recent rash of job cuts and skyrocketing interest rates on debt reinforce the truth that deleveraging can be extremely painful, especially for an economy that depends on debt as much as ours does, or did. Where once lenders didn't meet anyone to whom they wouldn't loan money, now they're only offering loans to those who can pay it back. That might sound like a good thing, but the pendulum has swung so far back to safety compared to the recklessness of recent years that, as one wag put it to me in a recent conversation, you can only borrow money if you don't need it.

What a paradox.

So what does the Great Deleveraging mean for you? It depends on a lot of variables. Some hospitals and health systems dug a pretty deep a hole for themselves with too-good-to-be-true derivative or swap transactions where they were fixing rates synthetically.

Meanwhile, hospitals that didn't try the swap magic are still often going wanting if they need new debt, but at least they aren't being forced to put up significant collateral to keep their debt covenants intact. For those that are having to put up additional capital to make up for the swap losses, in addition to everything else, they have to wonder whether they are going to get caught up in defaults that they thought they would never have approached.

So that's the bad news.

The good news may be this: You're going to be judged going forward on how well you do the blocking and tackling with operations. If you're offering poor patient care and bad customer service, for example, it's not as easy to cover that up with cheap debt, new glittering patient towers and technology purchases funded on the same, and promises that bad financial and operating performance will be fixed with the new toys. According to the finance section of our HealthLeaders Media Industry Survey, about 60% of hospital leaders expect their capital investment expenditures to decrease or remain flat in 2009. Many hospital CFOs and COOs I talk to now are focusing more effort than ever in collecting what they're owed, improving processes, bettering patient care, and other basics that should have been at the forefront of their intellectual capital demands all along—and they're only talking about expansion or acquisitions that can be accomplished organically. Much of this transformation has been forced upon us, it's true. But as the old saying goes, better late than never.

Our parents and grandparents always cautioned us about buying on credit, knowing as they did that it fostered carelessness and a tendency to focus on instant gratification rather than saving for and investing in the future. Collectively, we forgot that lesson for a while, but such wisdom has never seemed more prescient.