Aggressive efforts to squeeze expenses continue at hospitals and health systems in 2012. A strategy begun in response to the Great Recession, a weak economic recovery and the anticipation of new strains on operations from healthcare reform continues to force hospital executives to slash spending.
A 2% Medicare pay cut scheduled for February 2013, which is projected to total $123 billion through 2021, also factors into hospitals' cost-cutting plans. Credit-rating analysts say the spending discipline helped bolster hospital margins among not-for-profit healthcare borrowers. But after years of expense control, further reductions are hard to come by.
The benchmark index for tax-exempt bonds—a financing option regularly used by not-for-profit hospitals and systems—falls to a record low in November. Meanwhile, borrowers find the difference in their credit rating doesn't matter much as the spread—or difference in interest rates—has narrowed. As the year ends, tax-exempt healthcare borrowing is up to $29.6 billion from $22.8 billion in 2011, Thomson Reuters' data show.
Large and prominent not-for-profit health systems, however, enter the taxable public bond market for the first time in 2012, lured away from tax-exempt bonds by favorable interest rates and greater financing flexibility. In October, Dignity Health borrows $600 million from taxable markets, in part to finance its deal for the for-profit urgent care and occupational medicine network U.S. HealthWorks. A month later, Catholic Health Initiatives, Englewood, Colo., enters the taxable market in November with a $1.5 billion bond issue.
While weak patient volume and mounting reimbursement pressure create a challenging operating environment for investor-owned systems, the chains nevertheless manage to produce revenue gains for Wall Street.