Healthcare Business News

Hospitals, systems forced to cut spending

By Modern Healthcare
Posted: December 22, 2012 - 12:01 am ET

Aggressive efforts to squeeze expenses continue at hospitals and health systems in 2012. A strategy begun in response to the Great Recession, a weak economic recovery and the anticipation of new strains on operations from healthcare reform continues to force hospital executives to slash spending.

A 2% Medicare pay cut scheduled for February 2013, which is projected to total $123 billion through 2021, also factors into hospitals' cost-cutting plans. Credit-rating analysts say the spending discipline helped bolster hospital margins among not-for-profit healthcare borrowers. But after years of expense control, further reductions are hard to come by.

The benchmark index for tax-exempt bonds—a financing option regularly used by not-for-profit hospitals and systems—falls to a record low in November. Meanwhile, borrowers find the difference in their credit rating doesn't matter much as the spread—or difference in interest rates—has narrowed. As the year ends, tax-exempt healthcare borrowing is up to $29.6 billion from $22.8 billion in 2011, Thomson Reuters' data show.

Large and prominent not-for-profit health systems, however, enter the taxable public bond market for the first time in 2012, lured away from tax-exempt bonds by favorable interest rates and greater financing flexibility. In October, Dignity Health borrows $600 million from taxable markets, in part to finance its deal for the for-profit urgent care and occupational medicine network U.S. HealthWorks. A month later, Catholic Health Initiatives, Englewood, Colo., enters the taxable market in November with a $1.5 billion bond issue.

While weak patient volume and mounting reimbursement pressure create a challenging operating environment for investor-owned systems, the chains nevertheless manage to produce revenue gains for Wall Street.

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The debt markets are also open to the for-profit chains, many of which seek to refinance looming debt maturities on better terms. That effort, too, gives systems more flexibility and borrowing capacity to pursue acquisitions.

The for-profit systems grow their quarterly revenue on the back of increased outpatient activity as well as acquisitions that boost margins. They also sit on healthy cash balances that could be deployed toward more deals and partnerships.

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