3 Observations on Hospitals and the Capital Market Today

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Since the financial collapse of 2008, the government has kept interest rates at historically low levels, and consequently, non-profit hospitals have been issuing debt with very affordable conditions.

Claudia Gourdon, senior vice president and national marketing manager of Healthcare Finance Group, moderated a panel session at the Becker's Hospital Review 4th Annual Meeting in Chicago on May 9 with three healthcare executives: Jeff Taylor, CFO of St. Luke's Health System in Boise, Idaho, Mike Tretina, CFO of Mary Greeley Medical Center in Ames, Iowa, and Peter Myhre, senior vice president at Wells Fargo Equipment Finance. They discussed how their organizations are integrating with physicians today and what financial impacts those strategies are having.

1. Low interest rates are encouraging fixed-rate debt. St. Luke's has more than $1.5 billion in revenue and is an "A"-rated organization. Mr. Taylor said the low interest rates have allowed the system to convert its debt structure to 65 percent fixed and 35 percent variable. For hospitals looking to enter the market, especially the tax-exempt space, Mr. Taylor said it may be worthwhile to make a big splash now before rates inevitably go back up.

"If your credit is such that the best option is to not enter the markets too frequently, enter them in a big way so you can limit the associated costs of the offering," Mr. Taylor said. "But right now, take advantage of tax-exempt market."

2. Private bank placements have been an increasingly popular, and efficient, financing strategy. Private bank placements, or bank direct placements, are like publicly sold bonds in that they are issued for new money or refunding purposes and can be tax-exempt. However, they are sold directly to a single bondholder, such as a bank, that holds the bonds to maturity. Mr. Tretina said Mary Greeley Medical Center, which currently has 605 days cash on hand, recently used an investment bank to set up a placement. The hospital not only saved $100,000 in the issuance process due to reduced legal costs, lower accounting fees and no rating agency fees, but it also obtained a great rate in a quick period of time.

"What a difference a year makes," Mr. Tretina said. "We worked with an investment bank on both of our debt offerings, and the speed of private bank placement was incredible for us. We accomplished it in four to five weeks, and that includes going to city council and getting approval."

3. Equipment financing for IT projects, like electronic health record implementation, can be helpful in the right situation. Mr. Myhre of Wells Fargo said some of the greatest activity among hospitals in the financing markets involves EHRs, and most financing of EHRs has occurred in shorter terms between five and 10 years.

"This is the best time ever to be looking for money," Mr. Myhre said. "And the amount of debt that hospitals are adding on the books from [EHRs] is staggering. It's having a huge impact, and hospital CFOs are asking, 'What are my options?'"

More Articles on the Becker's Hospital Review 4th Annual Meeting:

Aligning Physicians: Key Financial Strategies at Innovative Health Systems
To Go it Alone: Should Hospitals Strive to Remain Independent?
Leaders From IU Health and UIC Hospital Define "Academic Medical Centers"

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