For Hospitals, Debt Parade Hasn't Stopped--Yet

Philip Betbeze, Senior Editor, Finance, December 1, 2007
As the credit crunch facing much of the economy refuses to fade, and in fact grows stronger, one sector seems somewhat immune. You guessed it: healthcare. While consumers and even banks seem to need a fresh infusion of capital that isn't coming, hospitals and healthcare companies are finding the spigot is still open--if a little more pricey.

While the price of money may have risen, at least hospitals can get it. Homeowners and many corporations that need debt are going wanting. But as our politicians and celebrities remind us ad nauseam through their actions, just because you can do something doesn't necessarily mean you should. As grandma and nationally syndicated personal money manager Dave Ramsey says, the borrower is slave to the lender. In the world of nonprofit finance, the borrower is also slave to the rating agencies. And the rating agencies--perhaps stung by their role in inflating the creditworthiness of esoteric collateralized debt obligations--are watching hospitals' balance sheets more closely than ever.

I listened to a conference call a couple of weeks back hosted by the healthcare analysts at Standard & Poor's. Turns out the ratio of credit quality downgrades to upgrades has risen dramatically for hospitals in the last quarter, by a count of 2-1. Why? Hospitals continue to take on additional debt.

Of the 11 hospital or system downgrades in the last quarter at S&P, seven were driven by additional debt or large capital plans on top of existing debt. Most of these organizations were rated highly to begin with, and in most of these cases, these organizations are expected to do well operationally going forward. But at some debt amount, the burden is too heavy to maintain a given rating. Still, hospitals seem to be getting their hands on that debt while the getting is still (relatively) good.

Analysts at S&P say that as a result of the continued borrowing, the hospital building boom may go on for the next couple of years as hospitals add fat for an expected long winter once government-led healthcare "reform" finally happens. Reform means a lot of things to a lot of people, but when you hear pundits and credit analysts talk about it, they're talking largely about reimbursement cuts. No one expects that before the next election, and predictions for cost cutting in healthcare are notoriously unreliable. But hospitals are voting with their borrowed dollars that now is a good time to start building the war chest in the form of updated bricks and mortar that will carry them through the next decade.

Rates for debt are still reasonable, and operationally, hospitals are doing much better, the analysts agreed. But operational improvements--at least as far as they translate to the bottom line--have essentially peaked.

The key takeaway from all of this? The rating agencies, rightly, wrongly, or late, are keeping a close eye on healthcare because of their mistakes in other sectors, and if you don't complete your anticipated borrowing soon, you're all going to have to pay a higher price.
Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at
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