Hospital acquisitions, medical office buildings, transportation systems and equipment purchases all helped to increase the amount of long-term liabilities of the nation's healthcare systems last year.
Hospital systems overall reported a 6% increase in long-term liabilities to $95 billion last year compared with $89.6 billion in 1999, according to Modern Healthcare's 25th annual Hospital Systems Survey (June 4, p. 36).
A total of 211 hospital systems provided long-term liability data. Of those, 135 not-for-profit systems reported a 3.3% increase in long-term liabilities to $41 billion last year from $39.7 billion in 1999, while 12 for-profit systems recorded an increase of 7.2% to $12.8 billion last year from $11.9 billion in 1999. Public systems, 21 of them, reported the largest increase in long-term liabilities, 10.2%, to almost $11 billion last year from just under $10 billion in 1999.
Long-term liabilities can include notes, mortgages, capital leases, bonds and obligations under continuing-care contracts. The survey polls systems that own, lease or sponsor at least two acute-care hospitals, and all findings are based on self-reported data.
The numbers seem to indicate that healthcare organizations took advantage of a favorable borrowing market in the past year thanks to attractive long-term interest rates, a trend that has continued so far this year.
One system that reported a sizable increase in its long-term liabilities was Indianapolis-based Clarian Health.
The not-for-profit three-hospital system reported a 77% jump in long-term liabilities last year, mostly because of a $351 million variable-rate bond issue in November 2000. About $45 million of the money was used to refinance some outstanding debt, and the rest is being used to pay for major capital expansion projects, says Katherine Arbuckle, Clarian's corporate controller.
One project is a $35 million "people mover," much like the monorail at Walt Disney World in Orlando, Fla. Construction began last month on the automated 1.5-mile rail system, which will connect the system's two campuses. The elevated rail system is expected to be completed by 2003. Although it will be open to the public, the system is intended to move employees and caregivers between the campuses.
"It's viewed really as a horizontal elevator," Arbuckle says.
She says Clarian conducted extensive financial modeling before it opted to take on the bond issue. "You've got to look out into the future to be sure that debt service will be adequately covered," Arbuckle says. Over the 20- to 30-year life of the bonds, Clarian is expected to repay about $740 million, including interest.
Arbuckle considers the tax-exempt bonds a bargain because of favorable interest rates. Since the bond issue, interest rates have ranged from 3% and 4%, and she is confident the rates will remain competitive over the life of the bonds.
Unlike for-profit chains, which can raise money without increasing debt thanks to the equities markets, the not-for-profits are limited to borrowing in one way or another because they don't have investors, says Brian McGough, managing director at Banc One Capital Markets in Chicago.
He says there were three main reasons systems increased their long-term liabilities last year: not-for-profits borrowing to finance acquisitions of other not-for-profit facilities; not-for-profit systems buying hospitals divested by for-profit companies; and investments in technology, especially costs related to addressing the anticipated Y2K computer problems.
"Considering those three variables . . . it's not surprising there has been a modest increase in debt," he says.
Three-hospital Palmetto Health Alliance, based in Columbia, S.C., increased its long-term liabilities almost 94% in 2000 to $314 million from $162 million in the previous year. Driving the increase was a $160 million bond issue in March 2000 that was used to reimburse the system for previous capital expenditures and to fund capital projects, including a $27 million, 122,000-square-foot medical office building, says Judy Cotchett Smith, a Palmetto spokeswoman.
According to data collected by Moody's Investors Service, a New York-based credit-rating agencys, $668.7 million was the median for long-term debt for multistate healthcare systems in 1999, the most recent year for which figures were available, says Kay Sifferman, a Moody's analyst. That figure includes notes, lines of credit and bonds. For 1998, the median totaled $636.2 million. She says the median has increased steadily since 1996 because as multistate healthcare systems have grown, so has their need for capital.
Hospital acquisitions also led to a bump in long-term liabilities at Health Management Associates, a Naples, Fla.-based for-profit chain.
HMA's liabilities increased 27% last year to $572 million, compared with $452 million in 1999.
The money, which comes from a revolving line of credit, was used to fund three hospital purchases, in Florida, North Carolina and Pennsylvania, and to repurchase about $40 million in stock, according to John Merriwether, HMA's director of financial relations.