S&P: Healthcare Getting a Grip on Expenses

Reform, the economy, and how they will affect your access to capital—it's a provocative topic for healthcare financial leaders and one that Standard and Poor's knows well. Although financial leaders might expect a negative account of these areas, in actuality, similar to the findings in my column last week, the picture is rosier than many realize.

"There have been a couple of periods in the financial community where you felt like the end of the world is here," Martin Arrick, managing director for the non-profit healthcare ratings division of S&P said at last week's 2011 Healthcare Financial Management Association annual meeting in Orlando, FL.

It took the healthcare sector a couple of years to recover from the 1990s downturn, but that period was followed by a "wonderful" decade, he said. That is, "until we had the end of the world again in 2008."

But the current state of healthcare finances isn't as bad as many in healthcare believe, he added. In fact, the economic downturn may have sparked financial leaders into taking actions that, in some instances, put hospitals and health systems on better financial footing.

"Right now [S&P] upgrades are exceeding the downgrades, and half the people we are seeing are doing better. And in some cases we're seeing [margin] numbers that match the 2006 peaks," he said.

But all is not bright. Unfortunately, although healthcare leaders may be getting a handle on expenses, S&P isn't so sure about the U.S. government and its grip on the overall economy. Arrick explained that in April his rating agency actually changed the outlook projection for the U.S. economy from "stable" to "negative" (although our country still maintains its "AAA" rating).

In the report, Arrick said, S&P economists wrote that the government didn't have a clear path toward addressing one major problem: Congress and the Obama administration need to enact a credible deficit reduction plan.

That is causing challenges for economists' future projections. "The crystal ball remains cloudier than usual," Arrick said. "The range of risks for the economy has never been greater. We are climbing out of the recession but the economy is running at half speed; it's a weak recovery."

So, while healthcare financial leaders are doing their part to pull hospitals and health systems back from the brink of financial mayhem, the U.S. economy isn't helping to speed that process along.

Moreover, while healthcare financial leaders have been scaling back large projects, cutting costs, and improving processes, growth has been on the backburner. However, after several years of tight purse strings, financial leaders know it's time to grow again in order to survive. A couple of ways Arrick mentioned that hospitals and health systems are improving access to capital:

1.       Mergers and acquisitions: Not surprisingly, Arrick notes there is an uptick in mergers and acquisitions. The merger of two healthcare facilities, one with a better credit rating than the other, can help the one that is struggling to refinance debt at a better rate, he notes.   

2.       Direct purchase debt: In the past, bank letters of credit were a major vehicle for capital, now the shift is toward direct lending, or direct purchase debt. Arrick cautioned, however, that comes with some risks. For instance, if a covenant violation occurs, the lender can call for hospitals to immediately pay back a loan. This type of loan means hospitals should retain enough liquidity to accommodate for this scenario. Also, he notes, the credit markets have gotten tighter but rates are more in line with historic norms of 5% to 6%. "Access is tougher but the rates are reasonable," he said.

Overall access to capital still requires financial leaders to pursue and possibly blend a variety of options to meet the growth needs of the facility. However, Arrick noted that in terms of getting access to that money, hospitals and health systems are now in a much better overall financial position to do so. "Virtually every number has improved," he said. "We are seeing more positive than negative—and that speaks to the credit stabilization."