As COVID-19 tests health systems' financial limits and depletes their investment portfolios, many are searching for short-term liquidity solutions.
The strategy looks different depending on the system. For Livonia, Mich.-based Trinity Health, it has meant drawing $885 million from four of its credit facilities. Advocate Aurora Health is issuing $700 million in taxable bonds, although the system said that was part of a pre-pandemic plan. UPMC took out a $300 million taxable bank loan.
"This was a simple move to secure liquidity in the face of uncertainty given this devastating public health crisis with COVID-19 and volatile financial markets," Cynthia Clemence, Trinity's interim chief financial officer, said in a statement. "We consider this a prudent and wise thing to do for our near- and long-term sustainability."
Health systems are in a particularly tough spot in the COVID-19 pandemic because they've had to shut down services like knee replacements and rotator cuff surgeries that are their most profitable revenue sources, said Guy Benstead, portfolio manager at Shelton Capital Management.
"There is an uncertainty around the financial profile of these borrowers on a go-forward basis," he said. "In street language, they're getting slammed with almost emergency care-ICU type care requirements on the coronavirus front that they may or may not make any money at all, and at least temporarily shutting down their more profitable lines of businesses."
For Peoria, Ill.-based OSF HealthCare, patients aren't coming for services that used to bring in most of the health system's revenue, and the health system doesn't have the capacity to make up for those volumes later on, said Mike Allen, the health system's chief financial officer. OSF projects COVID-19 will cause a $330 million decline in its operating performance over the next six months.
At the same time, OSF has watched its investments plummet and is trying to protect its cash reserves, Allen said.
"We need to find ways to find some short-term liquidity that will be less expensive than going to our depleted reserves," he said.
Relief has come in the form of advanced Medicare payments through the Coronavirus Aid, Relief and Economic Security Act. The health system has to start repaying in 120 days. At least for now, Allen said that will serve as the health system's line of credit.
"We have the resources," Allen said. "This isn't a question for OSF of whether we'll get through this. We will get through this."
Advocate Aurora Health said that at the end of 2019, the health system had $4.5 billion in daily and weekly liquidity, including operating cash, money market funds, dedicated bank lines of credit and commercial paper. The system also had $729 million in monthly liquidity, including funds and investment vehicles that allow withdrawals within one month or less.
Advocate Aurora also had $3.7 billion in longer-term liquidity, such as hedge fund and private equity investments, which require more than one month's notice to withdraw.
"Like the investments of all institutions, ours have been impacted by recent market turmoil," the health system said.
Despite entering the disruption with strong liquidity and financial standing, Rochester, Minn.-based Mayo Clinic is now spending approximately $1 billion in cash per month, Chief Financial Officer Dennis Dahlen said in a statement. The health system announced Friday it will begin furloughs and pay cuts near the end of the month.
"These interventions are necessary to reduce the rate of cash spending and extend liquidity reserves," Dahlen said.
In late 2019 and even into January, health systems issued bonds at a feverish pace to take advantage of historically low taxable and tax-exempt interest rates, and demand for debt was high.
However, since COVID-19 cases grew in mid-March, not-for-profit health systems have increasingly postponed sizable municipal bond issuances given the market's extreme volatility.
"I'm not seeing much in the way of going to the bond market right now," said Allen Fisher, global head of healthcare for Mitsubishi UFJ Financial Group. "I think there is just too much volatility and it's not an optimal time for anybody right now. I see not-for-profit hospitals hunkering down right now or drawing down on existing facilities."
For-profit hospitals are in a similar position: drawing down on their revolving credit lines and working to manage their fixed and variable costs as much as possible, Fisher said.
"Hospitals are good at doing that and I think they'll be doing that more now, particularly on the for-profit side," he said.
Meanwhile, the corporate bond market saw a record $260 million in issuance in March as companies across all industries sought to take advantage of low rates by swapping out short-term debt for long-term debt, Benstead said. Insurance companies, pension funds and others showed up in full force to buy the debt.
And like Trinity, almost every major company drew down their lines of credit with banks to buffer against unknown revenue declines, sending "hundreds of billions of dollars from bank balance sheets to company balance sheets," Benstead said.
Benstead said not-for-profit health systems may also benefit from a new, six-month Federal Reserve program that allows state and local governments to use their borrowing capacity to provide financial support for entities within their jurisdictions, including hospitals.
"In the sense that the fed is the fire department and their job is to put out the fires and make sure that the system doesn't burn down, they're doing the right thing, I think," he said.