If managed care becomes the primary tool of cost containment under healthcare reform, defaults on hospital revenue bonds could increase, a new study indicates.
Researchers in Richmond, Va., said their study of hospital defaults between 1988 and 1992 suggests that managed care could restrict cash flow and lead to more defaults. They didn't estimate the rate of future defaults.
The study by Michael J. McCue and Jan P. Clement, health administration professors at Virginia Commonwealth University's Medical College of Virginia, examined 22 hospital defaults.
Hospitals that defaulted on their bonds were located in mid-size markets, had smaller market shares and incurred higher expenses per discharge than a control group. The control group represented 260 hospitals that issued bonds about the same time as the hospitals in default.
The defaulted hospitals, with an average debt-service coverage ratio of 0.764, had much less cash to pay off debts. The average debt-service coverage ratio for the non-defaulting hospitals was 4.603. That means they had more than four times more cash flow than long-term debt. Healthy hospitals should have at least twice as much cash flow as the amount of principal and interest they owe, Mr. McCue said.
The defaulted hospitals also had higher amounts of debt than the non-defaulted hospitals. The average ratio of long-term-debt to capital for the non-default group was 0.488, while the ratio for defaulted hospitals was 1.624.
The findings suggest that the ability to avoid defaults rests with hospitals, the researchers said. "A hospital needs to generate sufficient cash flow to meet debt-service coverage and reduce its debt position. It can do so by capturing market share, which implies higher volume and greater revenues, and by lowering operating expenses," they said.
Hospitals can't reduce the risk of default by avoiding government payers, the study found. Government regulation and certificate-of-need laws also have no bearing on the likelihood of default, the researchers said.