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December 17, 2015

How the Fed's rate hike could affect health care

Daily Briefing

    The Federal Reserve on Wednesday announced it would raise the short-term interest rate for the first time in seven years, which could lead to increased borrowing among providers in the coming months.

    The widely anticipated announcement marks "the beginning of the end" for the Federal Reserve's program to stimulate the economy through low interest rates in the aftermath of the 2008 financial crisis, Binyamin Appelbaum reports for the New York Times. Short-term interest rates have hovered just above zero for nearly a decade to help spur hiring and economic growth.

    Now, as unemployment has fallen to about 5% and the economy has shown other signs of strength, the Federal Open Market Committee announced Wednesday that it unanimously voted to raise the short-term interest rate target to between 0.25% and 0.5%.

    Cleveland Clinic becomes first health care not-for-profit to issue a century bond

    "The economic recovery has clearly come a long way, although it is not complete," Federal Reserve Board Chair Janet Yellen said in a news conference.

    Yellen said that interest rates would continue to climb—if gradually. Federal Reserve Board members' median estimate is that the interest rate will increase to about 1.4% by the end of 2016 and to about 2.4% by the end of 2017. She added that the Federal Reserve would adjust its strategy based on the performance of the economy.

    According to the New York Times, the Federal Reserve is raising the rate to both guard against the risk of inflation and give itself more tools to respond to possible economic downturns in the future. But it also does not want to move too quickly and disrupt the economic recovery.

    Effect on borrowing

    Experts say credit and securities markets had begun to adapt to the widely expected rate increase even before it was announced. Steve Kennedy, a senior managing director at investment bank Lancaster Pollard who works with not-for-profit hospitals, says of the announcement, "We've all talked about it and now it's going to happen."

    Hospitals starting to go back to the bond market

    Even still, "the rate hike from the Fed—signaling overall strength in the U.S. economy—may actually have the effect of increasing borrowing among providers," says Christopher Kerns, an executive director at the Advisory Board Company.

    "Although the quarter-point rate hike isn't a huge jump for most providers, the upward direction of rates may induce some to issue debt before rates climb much higher," Kerns added.

    "And even with the Fed rate increase, interest rates for not-for-profit hospitals and health systems may not see a similar bump, given that demand for hospital bonds has outpaced supply for much of 2015, with the effect of pushing rates down overall."

    However, certain niche markets related to health care could be more vulnerable. For instance, even before the Federal Reserve officially raised rates, Medical Properties Trust has felt downward pressure on its stock price, Barron's reported in November. Medical Properties is a real estate investment trust (REIT) that invests exclusively in hospitals and long-term care providers, buying or developing facilities and then leasing them to operators. According to Barron's, it invested $1.5 billion in 2015 alone in hospital properties and owns about 150 properties across the United States.

    But the anticipated increase in interest rates has driven Medical Properties' stock price down 30% since January. The broader Dow Jones Equity REIT Index is down 10% over the same period (Morse, Healthcare Finance News, 12/16; Englander, Barron's, 11/21; Appelbaum, New York Times, 12/16; Evan, Modern Healthcare, 12/16; Davidson, USA Today, 12/16).

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