Operating out of buildings that are 50 to 100 years old, MetroHealth is due for a major face lift. The Cleveland-based system though faces some significant financial constraints. Serving many of the poor in Cuyahoga County, 50% of its revenue comes from Medicaid; it also cares for a large uninsured population. The county-run health system gets just 3% of its funds from subsidies.
So when time came to raise money for a new 12-story, 270-bed modern hospital on its main campus, MetroHealth turned to a booming bond market. In fact, MetroHealth found so much investor appetite this month for an outsized $946 million offering that the competition for the bonds drove down the interest rate to less than 5%. MetroHealth had four to five times as many bids for its bonds than the debt available to buy, CEO Dr. Akram Boutros said.
The replacement hospital is scheduled to open in 2022 next to a new 85-bed intensive-care unit tower that opened with operating room suites in July. MetroHealth used operating cashflow for the bulk of that $95 million ICU tower.
"It's a great time to go to market," said Pierre Bogacz, managing partner of healthcare financial adviser HFA Partners in Tampa, Fla. Hospital bond offerings have exploded over the past year despite a lull in January and February.
FB01Total hospital issuance of tax-exempt, fixed-rate revenue bonds has reached a pre-recession high of $27.7 billion in the 12 months ending June 30 with more than a month to go, HFA Partners found. That compares with a strong $21.1 billion in the previous 12 months and $20.5 billion in the period before that. By contrast, hospital issues totaled only $9.4 billion in the 12 months ended June 30, 2014.
Bogacz said the market is being fueled by a convergence of investors chasing the fairly safe, solid returns that hospital bonds offer as hospitals shake off the recession to raise capital for deferred maintenance and the ongoing patient shift in the industry to ambulatory care.
Like MetroHealth, many health systems are also looking to update their aging infrastructure. Fitch Ratings in a September report noted that hospitals with lower bond ratings had seen the average age of their facilities grow from about 10.5 years in 2008 to 11.5 years in 2015 because they had put off replacing them. Growth plans from years ago, immediately after the boom of the Affordable Care Act, are now being implemented.
Moreover, rates remain near historic lows, making it attractive to borrow now, he said. Highly rated Kaiser Permanente, which carried an A+ rating into its recent bond offering, raised a record $4.4 billion in three simultaneous issuances at a stellar interest rate of 3.8%.
Chicago-based Presence Health was able to complete a $1 billion bond offering in August, despite severe operating losses that the system corrected just months before the issuance. The money was used to refinance older bonds, giving Presence Health the breathing room it needed to continue a turnaround that saw the system improve to break even six months after a $186 million operating loss in 2015, CEO Mike Englehart said.
Both MetroHealth and Presence went into their offerings with bond ratings barely at investment grade.
Bogacz said hospitals might be motivated to issue bonds now before the healthcare market changes under a repeal of the Affordable Care Act.
Beyond financial uncertainty, many hospitals have been studying how quickly patient volumes were moving out of the hospital to ambulatory settings before spending big on new patient towers that might not be needed in the future, said Ryan Freel, senior vice president at healthcare financial advising company Kaufman, Hall & Associates.