Redefining Healthcare Finance: Time to Move Beyond the Long-Term Debt Crunch

I'm amazed at how many hospitals today are performing so well, running such strong margins, that they have millions in excess cash on hand. That's great news as we move closer to "healthcare reform" and the looming changes. The true financial impact of the so-called reform is still not known and many hospitals and systems are “hunkering down” for what may be a mighty blow to their balance sheet.  

The disparities between the most successful and efficiently run hospitals and those that continue to struggle just to survive will undoubtedly become much more apparent in the coming months. While you can’t do much about your reimbursement, you can find new ways to control costs, improve efficiencies and redefine your approach to healthcare finance.  

Long-term debt has long been a staple in the hospital world. Municipal or commercial bonds in the millions and hundreds of millions of dollars are propping up our nation’s healthcare system. We saw those bonds and the underlying ratings take a solid beating in this economy. Bond holders saw their seemingly “safe” investments undermined by downgrades and faltering States and local municipalities.

If you’re going to add a new wing to your hospital, or build an entirely new facility, 15-30 year money makes a lot of sense.  The fees are high, and in today’s market you better have a solid investment grade or plan to prop up your rating with insurance by one of the few bond insurers that managed to keep their own credit pristine.  Getting a bond deal done in this market, for most hospitals, has been a tall task. Bond financing plays a critical role but you must look at the entire picture. Matching asset life with debt term is paramount to your continuing success.  A good deal of your new bond issue will go towards retiring older bond debt. But, and this is where we need to redefine, if you have millions in “excess cash” on hand, why aren’t you paying down that long-term debt?  

That “excess cash” is a critical component to how you’ll position your hospital or system for the future.  Your choice is to keep your cash on hand, continue paying interest on your long-term debt and use some of the cash to pay for capital equipment purchases. Or, use the cash to pay down a portion of your long-term debt, save thousands or millions in long-term debt interest, reduce your total long-term debt and finance your equipment on shorter term debt at historic low rates and at terms that match your equipment life perfectly.

Carrying the interest full term on long-term bond debt is amongst the most costly expenses on your balance sheet. Simplify the equation and think of your home mortgage. By the time you’ve paid off your house, you’ve paid more than double the original price. Cutting your POs for double the price of all your equipment, disposables and ancillary devices would be unthinkable. So, why are you doing it?  

Shorter-term debt is at record low rates. In fact, currently shorter-term debt, 3-5 years, is actually below the rates of most, if not all of your bond debt. There are no fees, or minimal at best, paperwork is simple, you don’t have to move a mountain, but most importantly you’re matching the life of those assets financed with the life of your debt. You’re not paying double the price of those purchases in interest and you’ll begin to improve your bottom line in your first step towards redefining healthcare finance.  

How about true healthcare reform; things we can do within our own hospitals and systems to reform how we think about our finances?  

Match Asset Class with Debt Term. You wouldn’t finance a dishwasher on your home mortgage.

A long-term plan to reduce long-term debt will positively impact your bottom line and bring your hospital or system closer to financial stability through the looming unknown of the insurance reform. If you’re not “hunkering down,” good luck. Nobody anticipated the enormous investment losses that many hospitals suffered in 2008. Non-patient revenue in the negative of millions of dollars impacted your fund balance significantly. You may be running a tighter ship, tightened the budget, put off new equipment upgrades and non-essential spending and just look at that margin you’re running; for many of you, it’s truly a beautiful thing. Running strong profit margins in healthcare, especially for a non-profit hospital or system, is a task worthy of praise.  

Here’s the key to really turn those margins into a long term plan to move your facility or system through the turbulence of the current market and prepare it for the next stage of our Nation’s healthcare.  Take that excess cash, those excess millions, and start paying down that costly long-term bond debt.

Take advantage of 3-5 year money to finance your capital equipment purchases. Spending “cash” on those purchases can be a deceiving proposition. That cash is there as a result of your management strategy and operating performance. It’s also there in part because of the millions or hundreds of millions in long-term bond debt you’ve carried for the life of your hospital or system. While the bond debt has a definite place in our world as a life sustaining form of capital, it’s important to match asset class with debt term. It’s not truly “excess” cash and you would benefit greatly by using a portion of that to reduce your long-term debt. In fact you may be losing money by the thousands and millions by not rethinking your approach to your debt.  

Run a quick analysis of using a portion of your excess cash to pay down your long-term bond debt. Look at the reduced interest and overall reduction in debt. Now add a column for your new short-term debt for capital equipment purchases and compare. The savings will be staggering.

Together we can reform healthcare. We can do it in a more meaningful way, from the inside out. We can work together as an industry to identify best practices, take advantage of IT and state-of-the-art equipment that maximizes our profitable revenue and helps improve our efficiencies.  We can tackle process improvement, redefine healthcare finance and deliver quality care. Time to rethink in time for reform.

Shawn J. McBride is a vice president in the Healthcare Financial Services Division at People’s Capital and Leasing Corp. a subsidiary of People’s United Bank and has more than 15 years in healthcare finance. A member of HFMA and ACHE, Mr. McBride has participated in funding nearly $1 billion in the healthcare sector. He is based in Powder Springs, Ga., and can be reached at (678) 735-1706 or for questions or to provide a free budget consultation.

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