Hospital Finance: Things Could Get Ugly

Edition: July 2001 - Vol 9 Number 07
Article#: 1008
Author: Repertoire

For much of the past decade, hospitals have sagged under the weight of plummeting Medicare reimbursements, unfavorable contracts with HMOs and skyrocketing costs. In fact, between 1995 and 1999, hospital operating margins (operating profits divided by operating revenues) declined 67%, according to bond-rating agency Fitch.

Yet, despite these circumstances, money-losing hospitals have fared quite well in the recent past. How? By moving their investments from conservative vehicles, such as cash and bonds, to the stock market.

A report in the May 31 edition of The Wall Street Journal describes how that strategy, which seemed like a sure thing not too long ago, is threatening to backfire on a lot of hospitals.

''A more aggressive investment strategy has been a savior for virtually all hospitals,'' Fitch said in a report last year, according to the Journal. But now, with stocks having languished for months at prices sharply below their bull-market peaks, Fitch warns that that same strategy may be ''dangerous.''

Not surprisingly, Fitch and Standard & Poor's Corp. have slashed hospitals' credit ratings.

During the first quarter of 2001, S&P downgraded 20 hospitals and upgraded only four, according to the Journal. Fitch downgraded eight, and upgraded only one. And just as hospitals' finances have grown shakier, bond investors have started to demand higher interest rates from them to offset the higher risk of defaults. So, at the same time hospitals have a pressing need to borrow to make up for falling investment income, they also have to pay more for those borrowings.

To be sure, many hospital portfolios are still ahead of where they were five or 10 years ago, despite the recent woes on Wall Street, said the Journal report. But if a hospital's ''only source of profits is investment income, that is very risky,'' says Liz Sweeney, an analyst with S&P. ''If the market turns down again, it could get ugly.''