Stock Market Decline Hits Not-for-Profit Hospitals

Declining operating margins among the nation's not-for-profit hospitals in the second half of the 1990s led many to shift their assets into the stock market, a move that helped some "money-losing hospitals" to expand or "survive" during the bull market -- but the recent downturn in the market has placed the hospitals in a "risky situation," the Wall Street Journal reports. An analysis by the bond rating agency Fitch last year said, "A more aggressive investment strategy has been a savior for virtually all hospitals." Today, however, with stock prices "languish[ing] for months below their" peaks, Fitch has called the strategy "dangerous." In response to the weakening market, Fitch and Standard & Poor's Corp. have "sound[ed] the alarm by slashing hospitals' credit rating." Fitch downgraded eight hospitals and upgraded only one in Q1, while S&P downgraded 20 and upgraded four. As a result, bond investors have begun to "demand" higher interest rates from hospitals to "offset the higher risk of default," which has forced many facilities to "pay more for ... borrowing" while they have a "pressing need to borrow to make up for their plunging investment income." According to Liz Sweeney, an S&P analyst, a further downturn of the market could force hospitals to cut staff or services, or raise prices.

The Journal cites several examples of hospital systems that relied on the stock market to boost their finances, including MedStar Health, based in the Washington, D.C. area. In the 12 months ending June 1999, MedStar's investment portfolio rose about 20% to $680 million. "Flush with those gains," the system launched an expansion "that culminated in its February 2000 purchase of Georgetown University Hospital in Washington" for about $95 million. According to MedStar CEO John McDaniel, high investment gains allowed the system to "mask its weaknesses over 'some of the more difficult periods'" during the past two years, with investment income helping MedStar to "shoulder the costs" of closing a hospital, a nurses' strike and downsizing in primary care practices. But in the "past several months," MedStar's portfolio has declined by about $75 million to $450 million, and Fitch downgraded the system's bond rating in April. According to Michael Boyle, MedStar's CFO, the lower credit rating may force the system to pay .5 percentage points to .75 percentage points more in interest on borrowing, which could cost the system up to $1 million annually. Compounding the problem, MedStar still requires $140 million "to help pay for new technology, to finance its acquisition of Georgetown University Hospital and to pay for extensive repairs at the Georgetown facility." The declining stock returns, combined with shrinking Medicare reimbursements, have hit hospitals with a "double whammy," McDaniel said (Lagnado, Wall Street Journal, 5/31).