Hospitals nationwide are grappling with the best way to account for their long-suffering investment portfolios.
UPMC Health System in Pittsburgh last week faced the music and said it would take a whopping $161.5 million charge on its investments for the third quarter ended March 31.
Other hospital systems already have absorbed hits to their investment income in their financial statements and others likely will in the coming months, but none have been "of this magnitude," said Martin Arrick, managing director at Standard & Poor's. The good news is that UPMC had that much in investments to lose. The bad news is that they lost it-though really just on paper, he added.
"My take was that UPMC was very conservative in that it took a large write-down. Others are not taking such large amounts," Arrick said.
With the stock market on a long decline, how hospitals report what is vernacularly known as OTT, or "other than temporary impairment of investments," has been a topic of debate in healthcare financial circles in recent months, said Craig Kornett, senior director at Fitch Ratings. Before the Enron, WorldCom and Global Crossing scandals, OTTs were historically treated simply as unrealized losses or gains and not mentioned in financial statements, he said.
"I think the accounting profession decided to be conservative in accounting and disclose material losses, and there's been debate," Kornett said. Late last year, the Healthcare Financial Management Association issued a guideline stating that a hospital or system should possibly consider taking a charge when one of its investments loses 20% to 25% of its value over a six- to nine-month period, depending on the specific security, Kornett said. That guideline, in fact, is what triggered UPMC's write-down, said David Farner, UPMC's associate executive vice president. The system's investment portfolio is now worth $1.3 billion, down from $1.4 billion a year ago, with 60% invested in stocks and 40% invested in fixed-income securities, Farner said.
The one-time, noncash charge has no impact on the system's liquidity or operations and will not affect the system's A debt rating by either S&P or Fitch. In determining ratings, both credit-rating agencies are concerned more with the balance sheet and operations and only consider the current market value of investments.
But from a big picture perspective, the declining investment market was an implicit reason behind UPMC's downgraded debt rating last January to A from A+ with a stable outlook, Arrick said. Both S&P and Fitch noted at the time that from the standpoint of operating income, UPMC was turning a corner in 2003 with a positive margin, but its balance sheet strength had not kept pace with its phenomenal growth.
"To the extent there is a charge, we try to analyze what is really happening to create the charge and in the case of UPMC, it seems they were taking the vast majority (of investment losses) in one lump and trying to put it all behind them," Arrick said.
The charge reduces the 17-hospital system's margin by more than 4 percentage points and puts UPMC in the red. Including the charge, UPMC posted a $123.5 million loss on $3.1 billion in revenue for the first nine months of the fiscal year, Farner said. The write-down brings the system's total margin for the nine months ended March 31 down to -4.2% from 1.2%, compared with the year-ago period, when the system earned $7.7 million in net income. The system will "wind up the end of the year with a substantial loss," its first loss after years of profitability, said Robert Wetzler, director at Fitch.
With the investment market still off, Arrick guessed that the hospital industry will see some more of such write-downs (See related story, p. 26). In the fiscal year ended Sept. 30, 2002, Partners HealthCare System in Boston took a $31.5 million charge, Arrick said. Diminishing investment assets at Memorial Sloan-Kettering Cancer Center in New York spurred a $19 million charge in 2001 and a $9.1 million charge in 2002. Also in 2002, the Cleveland Clinic Foundation's high- profile investment losses resulted in a $25 million charge, Arrick said.
More significantly, three-hospital FirstHealth of the Carolinas, Pinehurst, N.C., took a charge of $46.5 million on revenue of $321 million for the fiscal year ended Sept. 30, 2002, Kornett said. Still, the charge did not affect its AA- credit rating on a $45.8 million bond refinancing in April, he said.
"The fact is, the market has been down a couple of years in a row and this is just one more manifestation of that," Arrick said.