Between a rock and a hard place: Interest rate hikes alarm some hospital CFOs

Stuck between getting inflation under control and preserving macroeconomic stability, Federal Reserve Chair Jerome Powell decided to raise interest rates by 25 basis points, a move with serious consequences for healthcare, hospital leaders told Becker's.

"I think this will exacerbate interest expense on all current outstanding variable rate debt," said Andrew Guarni, CFO of Newport, Calif.-based Hoag. "I also think it will curtail the ability for some healthcare organizations to borrow funds, which in turn will impact their ability to grow and continue to offer the quality healthcare that their communities deserve."

Fighting inflation during a banking crisis

The rate increase brought the Fed's benchmark target to between 4.75 and 5 percent, the highest since September 2007. 

However, Mr. Powell indicated that he would consider pausing interest rate hikes to help project confidence in the banking sector. 

"Before the recent events, we were clearly on track to continue with ongoing rate hikes. In fact, as of a couple weeks ago, it looked like we'd need to raise rates over the course of the year more than we expected," Mr. Powell said in a news conference.

In a March 22 Fed news release, the central bank reiterated its ongoing commitment to getting inflation under 2 percent.

A different era

Hospitals are a capital-intensive industry, carrying a large amount of debt on their balance sheets as they finance care along with massive renovation projects.

Under the low-interest rate regime, hospitals restructured debt to maximize profitability. In 2012, Franklin, Tenn.-based Community Health Systems exploited the era of loose money by raising a massive $1.6 billion to refinance its debt.

Now as hospitals deal with the financial fallout of the COVID-19 pandemic, the situation is dramatically different.

"Healthcare companies at the lower end of the rating scale have been hurt by several major trends over the last year, including labor shortages, wage pressures and supply chain issues, resulting in considerably weaker performance," a report from credit rating agency Moody's shared with Becker's said. "These developments have left many low-rated healthcare companies particularly exposed to rising interest rates, with many lacking a cushion in their credit metrics to withstand the higher interest expense compared to just two years ago."

Downstream effects

For some CFOs, the interest rate hikes are less a clinical issue and more of a workforce and housing issue.

"Now we have trouble filling positions and keeping staff due to the increasing cost of finding a place to live," said Dan Harris, CFO of Juneau-based Southeast Alaska Regional Health Consortium. "As a healthcare system we have been pushed into becoming more of a real estate management firm."

"While we acknowledge our work is healthcare, we now run a hotel, have overseen construction and management of apartment buildings, and have multiple rental units across the area we serve. The need to oversee and run these properties on a daily basis is something we have done so we can hire new staff into our market, to accommodate the need for locums and traveling staff, and to provide a home in markets with either no housing available or affordable."

Inflation the worse option for hospitals, expert says

When it comes down to rate hikes versus inflation, John Bowblis, PhD, a professor of economics at Oxford, Ohio-based Miami University, said the latter should trouble C-suite leaders more.

"Hospital executives can control the capital costs, because they can just say I'm going to delay an expansion. I'm going to delay a renovation so the interest rates while it may affect when they are taken, expansion or renovating a building," he said. 

"What they don't have control over is what their labor cost is. They don't have control over what they're paying for medical equipment and drugs and medical supplies and cleaning products. And so in the short run, inflation is a bigger problem for them than the higher spike in interest rates."

However, for hospitals already in a dire financial situation, Dr. Bowblis warned that higher interest rates could turn a bad situation worse."But you really shouldn't be raising money just to be able to operate," he said. "You should be hopefully making a small profit or at least breaking even. The higher interest rates only really affect financially distressed providers."

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