In more than 20 years of hospital financing, Marvin Eichorn says he's never seen it so bad.
Eichorn is chief financial officer of Mountain States Health Alliance, a seven-hospital system based in Johnson City, Tenn.
Mountain States boasts a dominant market position and an ongoing strategy to improve operating performance. Yet it struggled this month to complete a $380 million bond offering intended to free up cash and fund improvements at two of its facilities.
The deal took a year to pull off and cost $5.5 million more than originally projected because of higher interest rates and the climbing cost of bond insurance. A November 1999 offering date was delayed, and the deal was downsized from $445 million because demand for municipal bonds dried up in the latter part of the year.
Mountain States' experience provides a taste of what other systems can expect as they venture into the debt market this year. Offerings are likely to take more time and money to complete than they would have a year ago.
"In some respects it's almost a miracle we were able to get ours done," Eichorn says.
Mountain States issued debt in November 1998 to fund its purchase of Columbia/HCA Healthcare Corp.'s hospitals in northeastern Tennessee. When it decided to go back to the market a few months later, it found conditions were changing rapidly as investors recognized the reimbursement and cost pressures in the hospital industry.
Mountain States posted a net loss of $10.5 million on net patient revenue of $308 million for the fiscal year ended June 30, 1999. It projects a profit of $4.5 million on net patient revenue of $350 million for the current fiscal year.
A year ago, Mountain States set out to issue uninsured bonds but discovered that a wider spread in interest rates between insured and uninsured bonds made the cost prohibitive. Uninsured bonds now carry interest rates between one and two percentage points higher than insured bonds. A year ago, the difference was about half a percent.
Getting insurance was more difficult and expensive than in the past as well. "The major bond insurers have basically backed away from the market quite a bit," Eichorn says.
Because of higher interest and insurance costs, the new financing structure will cost the system $5.5 million more during the life of the bonds than its previous debt.
That's not the only sacrifice Mountain States made to obtain its financing. At the insistence of investors, the system agreed in its offering documents to send quarterly performance reports via fax, e-mail or overnight mail to investors holding $1 million or more in bonds. The reports will address admissions, emergency room visits, revenue, expenses and other operating information that the system already provides to its governing board.
"It's starting to get more and more like a public company in terms of disclosure, where (hospitals) will release quarterly earnings, and a lot of times investors will have a conference call with the CFO or CEO," Eichorn says. "I would suspect other (hospitals) issuing debt this year may wind up agreeing to disclose financial information. In our case, the bond funds insisted on it."
The agreement did not cause a controversy for the system, because it already shares its finances with the local media, Eichorn says. "It's not much different for us than what we've already been doing."