What can Hospitals do about their Spending and Borrowing in 2008?

Implications: Increasing interest rates and debt service, a Decrease in available cash, a Migration to more fixed rate borrowing and appeals to state governments for assistance, a delay in physical plant additions/upgrades

Analysis:  The sub-prime lending market trouble has reverberated to the auction rate securities market. For two months, we have seen failed auctions.  Some hospitals have seen their interest rates double or triple. According to the article “The interest rate University Hospitals paid climbed from 3.7 percent in January to 11 percent by mid-February, Bond said. “   Possible responses include turning to bank lines of credit, issuing long term fixed rate revenue bonds, cutting expenditures on the operating side and delaying capital spending.   Hospitals in the first tier of borrowing will be able to find all of the funds they need to obtain. However, the interest rates will be significantly higher. This will have an adverse impact on both operating and capital budgets this year. Although the budgets are approved and in motion, the actual debt service component will be higher than that represented in the Operating budget. Some funds can be obtained by postponing some of the lower priority items in the capital budget. Medical equipment items, especially those costing less than $1 million, should survive the cuts. Physical plant additions and upgrades and equipment costing more than $1 million, may be delayed one or two years. High priority items such as digital radiography and the Electronic Medical Record (EMR) will probably continue to be added without a noticeable decline in activity.   Second tier borrowing hospitals may not enjoy as much success in finding funds. However, they are less likely to have been involved in the auction rate securities market and therefore may already have established borrowing patterns. Third tier borrowing hospitals already had trouble finding funds and the current market will be no different. Their interest rates on new borrowing or leasing will also rise.   For all hospitals, payroll cuts may be an option. Hospitals spend about one half of every dollar on salaries and benefits. However, it is an area that may be easier to control than debt service, utilities, medical supplies, medical equipment or physician fees. The additional portion that will now be spent on higher debt service may be found in personnel cost savings.