Day after day, the tab continues to climb for tax-exempt hospitals, health systems and nursing homes caught in the nations latest financing crisis.
Interest rates on healthcare debt sold through frequent auctions have skyrocketed in recent weeks, as jittery investors hastily fled the so-called auction-rate securities. The exodus, prompted by bond insurers exposure to the troubled subprime mortgage market, has made buyers unwilling to purchase the debt without doubling or tripling the interest rate, if at all. Insurance is common among auction rate healthcare securities. In many cases, sellers had no takers, forcing them to hold onto the debt while requiring hospitals or other healthcare borrowers to pay the maximum interest rate. So widespread was investors pullout that banks and dealers, considered the safety net for the debt, have refused to bail out auctions, and instead let them fail.
Theres a new definition for a four-letter word that starts with F, said Vince Schmitz, chief financial officer of MultiCare Health System, a three-hospital system in Tacoma, Wash.
In one auction after the next, beginning Feb. 13, the systems interest rates jumped from between 3.4% and 3.7% to between 9.9% andin the case of one failed auction on $78 million15%. Auction-rate debt is typically sold every seven, 28 or 35 days.
Thats how my weeks been going, Schmitz said.
MultiCare saw some relief when the rate on $50 million dropped to 7.9% from 11% in one weekly auction. At 15%, MultiCares $306 million outstanding auction-rate debt would cost the system an additional $35 million per year.
Healthcare borrowers across the country have seen similar rate hikes. Christus Health, Irving, Texas, which owns or operates 20 hospitals, saw interest jump as high as 10%. SSM Health Care, St. Louis, which owns or manages 16 facilities, may opt for a short-term fix as it weighs how to pull out of the auction-rate market, a finance official said. The New York City Health and Hospitals Corp. hopes to have an exit strategy by March, another official said.
Hospitals and nursing homes accounted for roughly one-quarter of the $196.2 billion of the auction-rate debt issued in the past five years, according to Thompson Financial, a news and information company. Last year, those healthcare borrowers issued $10.8 billion in the securities. The markets collapse, starting in mid-February, sent healthcare borrowers interest rates soaring and left executives scrambling to contain the damage. Considered a stable and low-cost vehicle for borrowing, the market typically attracted health systems with stronger credit and financial strength, said healthcare finance experts. But borrowers financial strength has seemingly failed to soothe investors.
Basically, the investor pool has all but vanished, said Melissa Williams, systems director of debt and portfolio management for Christus Health. Its regardless of the insurer or the issuer rating, she says