How the Fed's rate cut could affect systems' investment plans

The Federal Reserve's decision to slash its benchmark interest rate could stoke more capital spending among hospitals and health systems, but some providers are waiting to see what happens next before taking action.

The Fed cut the benchmark rate by 0.5 percentage points at its Sept. 18 meeting, marking the central bank's first rate cut since early 2020. The move cuts the federal funds rate, the interest rate banks charge each other for short-term borrowing, and influences consumer and business borrowing and investments. Economists are watching to determine if the historically oversized rate cut — and possible additional cuts —can deliver a soft landing for the economy, which would signal inflation has been tamed without causing a recession.

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Lower interest rates typically spur more economic activity — including more spending, borrowing and investing in the financial markets. Some healthcare executives said the rate cut provides better access to capital to fund facility projects, potentially sparking a wave of new investment.

The cut could encourage health systems to issue more bonds or reprice existing ones, drawing in additional investor support while lowering the cost of capital for the issuer, according to analysts and executives.

Providers that issue bonds at lower rates can reinvest saved capital costs — which could potentially be millions of dollars, depending on the size of the bond — into other projects, said Rick Kes, a healthcare senior analyst at consultancy RSM.

Ardent Health President and CEO Marty Bonick said the rate cut could accelerate the for-profit system's post-initial public offering growth strategy, including leaning into ambulatory care in new and existing markets. Nashville, Tennessee-based Ardent recently repriced a term loan and expects to save about $5 million a year in interest expenses, he said.

"We’ll continue to be opportunistic when it comes to finding ways to strengthen our balance sheet, given the changing economic environment," Bonick said.

At Sacramento, California-based Sutter Health, CEO Warner Thomas said he expects bond activity to pick up as interest rates temper. Changes to the cost of capital are important in a market such as California, where hospitals and other facilities are particularly expensive to build.

The recent rate cut can be significant for health systems, even if they choose not to act right away. Some providers are opting to wait to see if rates continue to decline.

Dr. Steve Markovich, president and CEO at OhioHealth, said the Columbus-based system may consider variable rates on future bond issues if rates continue to fall.

Altamonte Springs, Florida-based AdventHealth also thinking long term. "While we recognize that changes in the rate environment can influence short-term market dynamics, our borrowing and investment strategies are designed with a long-term horizon, typically spanning five to 10 years," AdventHealth CEO Terry Shaw said.

Despite the potential benefits, lower rates could have some adverse effects on health systems.

Lower rates can translate into smaller returns on a health system's own investments in the financial markets, depending on how a system's portfolio is structured, said Eric Ralph, managing director at Highland Associates, a subsidiary of Regions Financial Corp.

Ralph said providers that rely more heavily on fixed income investments could see a decline in their returns, and if operations also are strained, they may feel pressured to pursue riskier investment strategies. A health system's cash and investment portfolio typically involves more money than any outstanding debt it has, he said.