Should hospital executives be concerned about a banking crisis? 4 CFOs weigh in

The recent fire-sale of First Republic Bank to JPMorgan Chase, the second largest bank failure in American history, is raising recession fears and forcing healthcare leaders to evaluate their exposure to macroeconomic risks.

2008 fears

For some healthcare leaders, the bank failures remind them of 2008 and the Great Recession. 

"Recent bank failures take us back to 2008. The administration is proposing to require banks to lower fees on high-risk customers and raise fees on low-risk customers," Ed Tucker, CFO of Mendenhall, Miss.-based Simpson General Hospital, told Becker's

"Didn't we learn from the 2008 financial crisis brought about by extending mortgage credit to high-risk individuals? It already appears that this latest situation will lead to more and more bank consolidation," he added. "Healthcare is local, even for big health systems. The loss of locally governed banks that know the local healthcare market is bound to have a negative effect on healthcare providers."

Despite the turmoil of the Great Recession, healthcare made it out relatively unscathed. Compared to other sectors of the economy, the number of healthcare jobs and national expenditures grew.

Economic crisis does have a way of reverberating back into healthcare. Unemployment brought about by a recession means that patients lose their employer-sponsored insurance. 

"We believe the unfortunate situation with the banking industry will carry over to other businesses and individuals," said Al White, CFO of Robinson, Ill.-based Crawford Memorial Hospital. "If this situation worsens, it seems reasonable to conclude there will be some reductions in company health insurance coverages and payments. And, as individuals are impacted by these changes, there will be a decrease in payments from patients on self-pay balances in addition to the reduced company insurance payments. Certainly, banks are a key economic driver."  

Strong and weak balance sheets

Limiting exposure to bank failure is a priority for all hospitals. However, for hospitals already in a precarious financial situation, particularly rural critical access hospitals, bank failure could be the difference between staying open or closing.

"We probably had 2 percent of our cash in the bank as uninsured. So that's $20 or $30 million of uninsured deposits," said Gregg Gerlin, CFO of Munster, Ind.-based Community Healthcare System. "I certainly don't want to be in a position to claim to my boss that the bank failed and we lost $25 million. But in the scheme of things, it's not going to be devastating for our health system or many health systems with strong balance sheets. It could be more of a risk for the health system that's running on the edge or critical access hospitals."

Despite some fears, Mr. Gerlin does believe that this period of banking instability "will be contained, unlike some of the previous downturns."

Downstream effects

Bank failures could have more diluted effects on healthcare than just impacting a hospital's balance sheet. The failure of Silicon Valley Bank in March led some health system venture capitalists to tell Becker's they were worried it would slow healthcare innovation. 

Similarly, some CFOs are less worried about the direct impact of a banking crisis on healthcare than the residual effects, such as the impact on housing for workers.

"There are two areas that will be impacted that are worth the time to plan for," said Daniel Harris, CFO of Juneau-based Southeast Alaska Regional Health Consortium. "First the market will most likely take the bad news and adjust down. Over time, this will come back but will impact short-term investment returns and cash flow.

"Being well prepared, a healthcare system that is operating well financially maybe can continue on without much impact but should have a plan in any case. The second is the need for housing; the banking issues will most likely cause interest rates to go up, making an already difficult housing market worse.

"So neither is a direct impact on healthcare, but we also live in the real world like every business does and so need to make adjustments and plans to assure our future."

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