As summer turned to fall, troubled investors pushed stock markets into a slide punctuated with wild swings and with unfortunate timing for some hospitals and health systems.
Market's volatility catch hospitals as quarter ends
Their balance sheets captured one of the low points of the volatility for the quarter or fiscal year that ended Sept. 30—a day the Dow Jones Industrial Average dropped by more than 200 points for the 10th time in three months. Signs of the market turmoil can be seen in sharply lower profits or net losses as hospitals and health systems begin to release unaudited financial statements.
That was the case with Kaiser Permenente's $45 million net loss for the third quarter. Sentara Healthcare, based in Norfolk, Va., finished the nine months that ended in September with net profits down by roughly
$100 million from the same period the prior year. “They are ugly months,” said Robert Broermann, chief financial officer of Sentara.
For healthcare borrowers that rely on investment portfolio cash to stay on good terms with lenders, market swings have added stress to balance sheets as the weak economy and federal fiscal woes have strained operations.
The tumultuous period included the 634-point drop to the DJIA following Standard & Poor's downgrade of U.S. debt, after the president and Congress failed to reach a deficit deal. The volatility continued last week as markets sank on news that a Congressional committee failed to meet its deadline to propose $1.2 trillion in deficit cuts.
Sentara, which owns eight hospitals, closed its books on the nine months ended in September with net gains of $101.2 million, compared with $202 million the prior year. Investment losses totaled $34.8 million through the end of September. Last year, investment income totaled $74 million for the same nine months.
Nonetheless, Sentara has sufficient operations and access to capital to ride out market swings without jeopardizing its operations or capital projects, Broermann said. “No one likes seeing the negative numbers, and you certainly pay attention, but if you have a diversified portfolio and the capital structure is appropriate, it shouldn't disrupt the operating and capital plans.”
Hospitals unable to withstand short-term market losses for the long-term equity returns “have no business” in such investments, Broermann said. He did, however, offer one stipulation: The strategy to ride out market volatility applies to markets that rebound. “If five bad months become 45 bad months, that's another story,” he said.
Broermann said the system's operations and capital plans do include investment returns, but only so much as the projected returns factor into the overall operating environment, which for hospitals appears weak as the economy continues to struggle and state and federal lawmakers look to curb healthcare spending.
That uncertainty stifles investments as hospitals seek to bolster balance sheets and cash by curbing spending, said Eddie Marmouget, a national partner with the accounting and consulting company BKD.
Hospitals have moved to shelter more cash from market volatility after markets plunged in late 2008 and early 2009, Marmouget said. He stressed that markets fell much farther during the credit crisis. The Dow Jones Industrial Average reached a 12-year low March 9, 2009. “Everywhere you look, there is so much uncertainty,” Marmouget said, so hospitals have focused on strengthening balance sheets with more conservative investments.
In Arizona, Banner Health lost $65.5 million on investments in the first nine months of the year, compared with a $136.5 million gain for the same period in 2010 “owing to a pretty dismal September,” Dennis Dahlen, the Phoenix, Ariz.-based health system's CFO, said on an investor call in mid-November.
The system, which includes 22 hospitals, ended the nine months with $247.6 million in operating gains, but Banner Health's net margin was -1.7% thanks to its investment losses and poorly performing interest swaps.
Kaiser Permanente, a 30-hospital system based in Oakland, Calif., reported a nonoperating loss of $365 million for its third quarter and a net loss of $45 million. “Due to the fluctuation in the market and the timing of the quarter end, we realized a loss in both nonoperating income and net income for the quarter, although our performance is positive for the year to date,” Kaiser Permanente spokesman Robert Garcia said.
For hospitals and systems that will close their books in December—such as Sentara, Banner and Kaiser—September's dour markets dragged down performance as the year nears a close. But for others, Sept. 30 marks the end of the fiscal year.
CoxHealth, based in Springfield, Mo., closed its books in September with operating income up 130% but net income down 40%. A spokeswoman for CoxHealth declined an interview request.
The two-hospital system's investment returns dropped by 78% to slightly more than $1 million. Meanwhile, CoxHealth reported unrealized losses—the loss if the system cashed out its portfolio and dropped any interest rate hedges—of $7.5 million compared with a profit of $7 million for the prior year.
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