For health systems already accustomed to shifting gears based on regulatory changes, 2014 offers another government body that busy CFOs will have to closely watch: the Federal Reserve.
The Fed indicated in December that it plans to modestly “taper” its recession-era debt buyback program referred to as quantitative easing. While the ripple effect of that decision remains unclear, financial markets for now seem to view it as a vote of confidence in an improving economy.
But interest rates on the 10-year Treasury note—a good benchmark for other long-term, fixed-rate notes—are already on the upswing. And as the cost of capital increases, so too will the pressure on income statements and cash flow, especially for hospitals already struggling to make ends meet.
“There's going to be an inherent pinch,” said Steve Kennedy, senior vice president at Lancaster Pollard, a financial advisory firm. “Those hospitals that are not investment-grade, I think that's going to be the most challenging.”
See a slideshow of the people to watch in 2014
All three credit-rating agencies have negative outlooks on the not-for-profit hospital sector. “There's opportunity in the healthcare space but it's reserved for the systems that have the flexibility to take advantage of it,” he said.
Easy access to debt financing has been one of the factors propelling healthcare mergers and acquisitions, and particularly big-ticket acquisitions. Still, no one is expecting a damper on consolidation.
“In general, we expect access to capital to remain good,” said Karen Anillo, senior vice president and team leader of the healthcare industry banking group at Associated Bank. “We see continued M&A in almost all the sectors of healthcare. Scale is key in this new environment.”
“For borrowers that have a fixed-rate debt structure, they already have low rates,” added James Goody, vice president and portfolio manager at Associated, who said that there is still demand from lenders to extend credit. “Banks are quite hungry to lend today and they will continue to be hungry in 2014.”
However, rising rates may reduce the number of systems that are looking to play a larger role in the front end of healthcare financing by either applying for an insurance license or acquiring health plans.
Clark Knapp, principal at Deloitte Consulting, said those systems will need to keep at least $10 million in reserves as they take on more risk. “The reserve requirements associated with operating your own health plan are significant to say the least,” he said. “For organizations that are already cash-strapped, the ability to do so is not there.”
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