While many hospitals are seeing their margins slowly recover, some are still struggling and may soon default on their debts. In an attempt to avoid default, hospitals are choosing to close unprofitable services, sell assets, cut jobs, and more.
According to a new report from Kaufman Hall, nationwide hospital operating margins are still below pre-pandemic levels, but are slowly inching back up, particularly as labor expenses decline and revenues increase due to higher patient utilization, especially in outpatient settings.
However, some hospitals, particularly those that operate alone or are part of small systems, are still struggling financially. Some hospitals are currently reporting that they do not have enough cash to satisfy lenders, who typically require them to meet periodic financial targets.
"Failures to meet such obligations to lenders can technically count as default, putting hospitals at risk of credit downgrades and higher interest rates," the Wall Street Journal writes.
According to Municipal Market Analytics, hospitals have reported some kind of repayment difficulty for over $10 billion in municipal bonds over the last year. Overall, around $12 billion in hospital bonds is affected, making up almost 4% of all hospital municipal bond debt outstanding.
Currently, some hospitals are refinancing their debt for new loan terms or negotiating with lenders for more time to pay what they owe. Some hospitals are also closing or scaling back unprofitable services, selling some of their assets, or reducing pay, temporary workers, and jobs to avoid defaulting on their debts.
According to a new report from Challenger, Gray & Christmas, the healthcare industry, including hospitals, had the fourth-most job cuts so far this year. In total, there were 38,279 job cuts in the healthcare industry during the first half of 2023 — a 97% increase from the 19,390 jobs reported during the same period in 2022.
Although hospital municipal bonds have been popular over the last decade, this changed last year when rising interest rates significantly reduced the value of outstanding bonds, which put off many investors. According to Refinitiv Lipper, investors pulled around $7 billion from municipal bond mutual funds in the first half of 2023, adding to the over $80 billion pulled last year.
Some investors have also begun requiring extra interest on hospital and healthcare bonds as cost pressures increase. On June 20, investment bank Raymond James said that healthcare providers with a middle-investment-grade of A paid one percentage point more than top-rated borrowers, more than double compared to two years earlier.
Dan Solender, director of tax-free fixed income at Lord Abbett, said he is currently taking a close look at the finances of lower-rated hospital issuers in the company's portfolio. Most hospital bonds are fine, but for a few, "there's a question whether we hold or sell," he said.
Banks, which often buy hospital debt, are also moving away from municipal bonds. In the first quarter of the year, banks reduced their overall municipal bond holdings from $580 billion to $567 billion. Many regional banks are also holding on to older, lower-yield bonds, which contributed to the collapse of two banks and left others with less ability to take on new hospital debt.
Recently, "it's been crickets," said Abigail Urtz, SVP at broker dealer FHN Financial. "There's zero banks buying." (Gillers/Evans, Wall Street Journal, 7/5; Gooch, Becker's Hospital Review, 7/6; Challenger, Gray & Christmas report, 7/6)
The past few years have been hard for health system strategic planners, and it's not getting any easier. To find out the top challenges and priorities for the coming year, we surveyed 57 leaders at member organizations. Read on to learn the six key findings from our research.
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