Is the Other Economic Shoe Going to Drop in Healthcare?

HealthLeaders Media Staff, December 7, 2009

My husband is a doctor who has owned his own practice for several years. In the time I've known him, I've watched him toil over his balance sheets, ponder marketing campaigns, and read up on growth opportunities. I've also heard sad tales of how his long-time patients have lost their jobs, their insurance, and even their houses and in this economy, his patient's woes translate into his practice's ones.

My husband isn't running a large, 900-bed facility with hundreds of employees, but the problems he faces are very similar to the ones hospital CFOs face too—how to keep the business going and still help people. Unquestionably, it's difficult to focus on the latter when you are doing everything you can to keep your books in the black and seemingly every outside agency is working against you. And there are many, myself included, who wonder if the other economic shoe is going to drop in healthcare—and a "W" or double-dip recession will smack us over the heads.

I was speaking to a CFO this week who made a few remarks that really resonated with me. He was pondering the possibility of the economic double dip and the ramifications it would have for hospitals with large Medicare patients who have been cost cutting to stay afloat. He remarked, "You can't cut yourself to prosperity." How true it is.

Interestingly Fox News interviewed President Obama in late November and he explained that if the nation keeps adding to deficit spending through tax cuts or more stimulus spending, eventually people could lose confidence in the U.S. economy and that could "lead to a double-dip recession."

Cutting costs isn't the way to get out of a recession, and financial leaders know it; the only way out is to grow. You can grow two ways: (1) by hiring physicians and other top staff, and (2) expanding your facilities. We know employment is up at hospitals nationwide. The healthcare sector reported 21,000 payroll additions in November, according to U.S. Bureau of Labor Statistics, and 613,000 payroll additions since the start of the recession in December 2007. The healthcare sector has created 249,700 new jobs in the first 11 months of 2009, an average of 22,700 new jobs each month, the BLS reported. So, it seems CFOs are working on growth opportunity number one.

Then there's the second path, building. Unfortunately growth via this avenue has been hindered by the bond market. The government tried to come to the rescue with a new program that allows hospitals to essentially triple the amount of bank-qualified bonds they may sell per year. The American Recovery and Reinvestment Act of 2009 added a temporary provision allowing nonprofit hospitals and other 501(c)(3) organizations to sell up to $30 million in tax-exempt, bank-qualified bonds in a single calendar year. Notice that this is a temporary provision. It expires December 2010, which gives hospitals just about a year to get this area of their finances squared away.

Unfortunately, having a great deal of outstanding debt, and too much of it tied to variable rate bonds, is likely to have a negative affect on your investor's credit rating, making it more difficult to get the new loans needed to build. However, assuming a facility can get new bonds secured, hospitals can begin the process of building and/or renovating, which means more space, and therefore (ideally), more patients and a larger market share. What does this all have to do with a double-dip in the economy?

Growth isn't easy for any business, but what makes it more complex is the unknowns that can disrupt the best laid plans. You may have missed it the week of Thanksgiving, but Moody's released a three-page sector comment called U.S. Health Care Reform: Credit Threat for High Cost Urban Hospitals. This Moody's sector comment noted:

"Both [House and Senate healthcare reform] bills highlight the conflicting goals of healthcare reform: (1) expanding the number of insured patients—while (2) restraining future healthcare costs. Achievement of these goals will affect hospitals in different ways, but cost control measures could be especially negative for the credit position of many high-cost urban hospitals even if the number of insured patients expands," the report noted.

The Moody's piece goes on to explain, "The drive to control costs is fueled by rising Medicare costs, as well as by research such as that conducted by Dartmouth College, which has published an 'atlas' of differing medical practices and costs by 306 Hospital Referral Regions (HRR) across the United States."

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