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S&P: Healthcare Getting a Grip on Expenses

Karen Minich-Pourshadi, for HealthLeaders Media, July 5, 2011

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.

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