Elizabeth Mills, a partner specializing in tax-exemption issues in the Chicago office of law firm McDermott Will & Emery, says the proposal doesnt make a whole lot of sense, presenting a Catch-22 for hospitals. As far as the reality of the market goes, in order to be creditworthy and be able to borrow at lower rates, a hospital has to have a strong operating statement and balance sheet. For example, days-cash-on-hand is a measure that the rating agencies use. (The CBO) is taking the approach of limiting investment returns on what the report views as excess cash, she says.
It will make the hospitals financial positions weaker so that they will borrow at higher rates. Nothing will be achieved.
Cyganowski says that Catch-22 in the analysis is the fundamental flaw in the report. They underplay the importance of cash reserves to the prudent operation of a hospital, he says. The suggestion that hospitals that have little cash or that 100 days cash on hand is sufficient to protect them against a downturn is ludicrous. You cant regulate the management of hospitals, and thats the mistake Congress always makes.
Hospitals with 100 days of cash on hand typically fall into a BBB- credit rating, the minimum threshold for investment-grade debt, according to Martin Arrick, managing director for Standard & Poors not-for-profit healthcare group. Hospitals are enjoying one of the most attractive bond markets in years, so the interest spreads between hospitals with the highest and the lowest credit ratings are very narrow, Cyganowski notes. A hospital with a BBB- rating can borrow at 5% interest while hospitals rated AA are borrowing at 4.5%, he says. But that is beside the point, according to Arrick. Why is it in the governments interest to reduce access to capital? There is no special pool of capital for healthcare providers, Arrick says. I feel you can make the case that you want an organization to be as strong as possible to bulk up the balance sheet as much as you could to safeguard against harder times.
Indeed, Kevin Brennan, executive vice president and chief financial officer for Geisinger Health System, Danville, Pa., says the three-hospital systems formidable cash balance is our log cabin that we built over many, many years one log at a time. We shouldnt have to start burning logs. Providing a community benefit is a responsibility that Geisinger takes seriously in exchange for its tax exemption, Brennan notes. In the year ended June 30, 2005, for example, Geisinger spent more than $100 million7.5% of its operating expenseson services that benefited the community such as charity care, education and research, he says.
The rural health system, which now has about $900 million in surplus, equivalent to about 200 days of cash on hand, survived the drastic reductions of the Balanced Budget Amendment of 1997 and over the past 10 years has invested $100 million in the development of an electronic health record, he says. We survived, and thats exactly what the cash balance is meant to do, Brennan says. Its not prudent for Congress to deteriorate that kind of strength.
Geisinger currently has $317 million in debt and is paying 3.8% interest, Brennan says. Last month, S&P raised its rating to AA from AA-, in large part, Brennan says, because of its sizable investments.
Brennan estimates that if Geisinger were to be limited in the amount of interest it could earn on its surplus as a result of new arbitrage regulations, it could cost the health system an additional $6 million a year. If public policy eroded our ability to generate a margin, obviously we would either erode the balance sheet long term or limit the amount of improvement we could invest in, he says.