Search

Tax-exempt hospitals and health systems often borrow long-term debt to fund capital investments. Lenders use bond ratings as a standard metric to assess whether to lend funds to a hospital. Credit rating agencies have historically relied on financial performance measures and a hospital's ability to service debt obligations to determine bond ratings. With the growth in pay-for-performance-based reimbursement models, rating agencies are expanding their hospital bond rating criteria to include hospital utilization and value-based purchasing (VBP) measures. In this study, we evaluated the relationship between the Hospital VBP domains--Clinical Process of Care, Patient Experience of Care, Outcome, and Medicare Spending per Beneficiary (MSPB)--and hospital bond ratings. Given the historical focus on financial performance, we hypothesized that hospital bond ratings are not associated with any of the Hospital VBP domains. This was a retrospective, cross-sectional study of all hospitals that were rated by Moody's for fiscal year 2012 and participated in the Centers for Medicare & Medicaid Services' VBP program as of January 2014 (N = 285). Of the 285 hospitals in the study, 15% had been assigned a bond rating of Aa, and 46% had been assigned an A rating. Using a binary logistic regression model, we found an association between MSPB only and bond ratings, after controlling for other VBP and financial performance scores; however, MSPB did not improve the overall predictive accuracy of the model. Inclusion of VBP scores in the methodology used to determine hospital bond ratings is likely to affect hospital bond ratings in the near term.

The relation between clinical quality and bond rating for nonprofit hospitals has been proposed but never fully studied. We analyzed the relation between bond rating, clinical quality measures (The Joint Commission/Centers for Medicare and Medicaid Services [CMS] core measures), and balance sheet and income statement financial measures of 236 hospitals across the United States that are rated by Moody's Investors Service and that reported clinical quality measures to CMS during the study period. We found a statistically significant relation between higher quality measures and more favorable bond ratings. This association remained significant after controlling for traditional financial parameters.

FHA hospital mortgage insurance, also called the Section 242 program, acts as a credit enhancement that allows borrowers to issue bonds up to the equivalent of an "AAA" rating, with the benefits of lower interest rates. Although the program has operated in relative obscurity over its 40 years of existence, the FHA has undertaken a new marketing campaign to raise its profile. Federal backing may make the program an attractive option amid today's financial turmoil in the capital markets.

Healthcare organizations should take into consideration the impact that portfolio investment decisions have on key credit metrics.

Although the use of derivatives, particularly interest rate swaps, has grown explosively over the past decade, derivative financial instrument use by nonprofits has received only limited attention in the research literature. Because little is known about the risk management activities of nonprofits, the impact of these instruments on the ability of nonprofits to raise capital may have significant public policy implications. The primary motivation of this study is to determine the types of derivatives used by nonprofits and estimate the frequency of their use among these organizations. Our study also extends contemporary finance theory by an empirical examination of the motivation for interest rate swap usage among nonprofits. Our empirical data came from 193 large nonprofit health care providers that issued debt to the public between 2000 and 2003. We used a univariate analysis and a multivariate analysis relying on logistic regression models to test alternative explanations of interest rate swaps usage by nonprofits, finding that more than 45 percent of our sample, 88 organizations, used interest rate swaps with an aggregate notional value in excess of $8.3 billion. Our empirical tests indicate the primary motive for nonprofits to use interest rate derivatives is to hedge their exposure to interest rate risk. Although these derivatives are a useful risk management tool, under conditions of falling bond market interest rates these derivatives may also expose a nonprofit swap user to the risk of a material unscheduled termination payment. Finally, we found considerable diversity in the informativeness of footnote disclosure among sample organizations that used interest rate swaps. Many nonprofits did not disclose these risks in their financial statements. In conclusion, we find financial managers in large nonprofits commonly use derivative financial instruments as risk management tools, but the use of interest rate swaps by nonprofits may expose them to other risks that are not adequately disclosed in their financial statements.

The utilization of interest rate derivative instruments in US for-profit companies has grown exponentially since the early 1980s. International Swaps and Derivatives Association, Inc. (ISDA), reported that the amount of outstanding standard swaps grew by 25 percent during the first six months of 2003. The growth rate of all interest rate derivatives, which includes single-currency interest rate swaps, cross-currency interest rate swaps, and interest rate options, grew by 24 percent during the same period. The total outstanding amount of interest rate derivatives now totals $123.9 trillion compared to $99.9 trillion at the end of 2002 (Dodd, 2003). This explosion in usage is a testament to the efficacy and flexibility of the instruments and the increased appreciation by financial managers of the importance of financial risk management in a volatile interest rate environment.

The old standbys remain by far the financing vehicles of choice for hospitals. But other, less traditional methods are gaining a foothold as not-for-profit hospitals look elsewhere--usually the corporate world--for successful precedents that can help fund big projects without leaving a bad financial aftertaste.

CFOs aren't partying like it's the 1990s, but healthcare portfolios did deliver double-digit increases in 2003, a Commonfund Institute survey said. Executives, seeking to avoid losses, have invested in controversial hedge funds, which have become a little too popular, says the institute's executive director, John Griswold, left.

To maintain their viability, hospitals are being compelled to invest in big capital projects such as information technology and renovation and construction. This gatefold examines the trends in credit and capital, and how they affect hospitals' access to money.

Certain strategies can offer not-for-profit hospitals potentially greater investment yields while maintaining stability and principal safety. Treasury inflation-indexed securities can offer good returns, low volatility, and inflation protection. "Enhanced cash" strategies offer liquidity and help to preserve capital. Stable value "wrappers" allow hospitals to pursue higher-yielding fixed-income securities without an increase in volatility.

Volume is rising at a healthy pact. Technology is improving patient care. Many organizations have, out of necessity, strengthened business fundamentals, controlled costs and refined their focus. Yet not-for-profit hospitals are squeezed by a cash crunch that has balance sheets under pressure and credit downgrades outpacing upgrades--the result of shrinking investment income, rising pension obligations, low government reimbursement and other threats to operational stability. N&HN looks at the challenges, including recent fallout from the most pressing issues, how some systems have responded, and the pros and cons of borrowing now.

On hospital credit ratings, the news is tough and tougher--what many industry watchers call a capital crisis in the making. Rating agencies contend the situation has been building for years, even while hospital margins reached historic highs as recently as 1997. "Then everything fell apart at the seams," says one bond rating pro.

Derivatives--financial instruments with a rate of return derived from an underlying asset--have been used as investment instruments for decades. Many derivative products originally were created explicitly for the purpose of reducing financial risks and have become more widely used and more complex in recent years. Healthcare financial managers should have a basic understanding of derivatives as well as the ability to apply general guidelines for their appropriate use in healthcare financial management.

Securitization began in the 1980s with mortgage payments, auto loans, and credit card debt being pooled and used as collateral for securities offerings. More recently, healthcare providers have securitized accounts receivables to obtain low-cost, off-balance-sheet financing. As the need to both raise capital and contain costs grows in health care, providers likely will make increased use of this financing method.

As the revenues of healthcare organizations continue to decline, finding ways to raise low-cost capital has become increasingly important. By incorporating municipal bond insurance into a finance plan, healthcare organizations can achieve sizable debt-service savings for both new-money projects and refunding transactions. Bonds insured by one of the major municipal bond issuers are enhanced and carry AAA ratings from Moody's Investors Service, Standard & Poor's Corp., and, in some cases, Fitch Investors Service. Thus enhanced, they can attract a broader range of investors than uninsured issuers and can make it easier for healthcare organizations to raise long-term capital in a cost-effective manner.