The curse of “low visibility” isn’t limited to corporations and manufacturers who wonder when their numbers will turn positive — health care systems are operating in a bit of a fog, too.
That’s what the chief financial officer of Mountain States Health Alliance said Wednesday as the region’s largest hospital system announced the purchase of another hospital.
“We’re going to have to make some judgment calls and make some degree of certainty about what we think is going to happen next year,” MSHA CFO Marvin Eichorn said in regard to budget preparations for the system’s fiscal year that starts July 1.
Since announcing in February 2008 that it would buy a 50.1 percent stake in Abingdon, Va.’s Johnston Memorial Hospital, MSHA has seen the credit markets, where MSHA borrows money, and the economy, which is crucial to MSHA making money, both turned upside-down.
For evidence of how significantly that has affected hospital systems’ borrowing, consider this: MSHA’s $127 million bond issuance earlier this week was the first by any U.S. hospital system with a bond rating below “A” since the credit crisis hit in September. (MSHA’s rating is BBB-plus “stable,” just below an A.)
Eichorn said all the uncertainty has systems putting a lot of projects on hold, just as Mountain States did temporarily with the JMH purchase, which was set to close at the end of November. The system decided the strategic advantage of owning JMH trumped interest rates that remained unpalatably high — 7.91 percent, in the case of this week’s bonds.
“In my view, these tax exempt rates are way too high right now, and if rates come down I’m almost certain we would try to refinance to get the rate lowered, but that could be three or four years,” Eichorn said.
“It’s hard to feel good about 7.91 percent. It’s not the home run that we could have gotten back last summer (rates were about 5.5 percent then), but we’re excited about working closer with JMH.”
MSHA had an operating margin of less than 1 percent last year, while JMH’s was more than 5 percent, and still above 2.5 percent with an affiliated physicians group’s performance thrown into the mix.
But just as the credit markets are wobbly and uncertain, so too is the health care reimbursement system as job losses leave more people uninsured and government payors consider cutting what they pay for procedures. Eichorn said hospital systems already have seen effects of that in the number of people being admitted for elective procedures.
If the economic situation continues to deteriorate, hospitals are likely to wind up with lower cash flow, and less ability to finance new debt or pay for smaller improvements from the money they make. JMH had 10 percent growth in admissions last year and was on track for similar growth in the summer and early fall, but recent events make it imprudent to simply expect more of the same.
“Anything that’s elective, there’s no question that we have not seen the increases we’re used to seeing, and in some types of procedures seen actual decreases.
“That’s the wild card in all this. No one really knows where all this is going, so we’re going to be very cautious about capital investments.”
With some type of health care reform looming, and with government at state and federal levels facing shortfalls, Eichorn said even more rough sailing could be on the horizon.
“We recently learned that there won’t be any cuts to TennCare reimbursements or Virginia Medicaid in the 2010 fiscal year (beginning July 1), but both states told us that was only because of the federal stimulus money,” Eichorn said.
“They said in 18 months, if there wasn’t a turnaround in the economy and budget situations, those cuts would come.”