Hospitals face ‘the end of cheap money’

Borrowing costs are rising after the Federal Reserve raised its benchmark rate for the second time in two months. Hospitals are facing financial headwinds on a number of fronts.

With the Federal Reserve raising its key interest rate for the second time in a few months, hospital and health system leaders will see higher borrowing costs.

Rick Gundling, senior vice president of healthcare financial practices at the Healthcare Financial Management Association, put it succinctly.

“We’re starting to see the end of cheap money,” Gundling told Chief Healthcare Executive.

“It was unprecedented to have the rates as low as they’ve been,” he said.

Last week, the Federal Reserve raised its benchmark interest rate by 0.5%, the largest increase since 2000. It comes on the heels of the Fed boosting the rate in March.

The Federal Reserve is acting to try and put the brakes on inflation, which has reached its highest level in four decades. “Inflation is much too high,” Jerome Powell, chairman of the Federal Reserve said at a news conference last week, the Associated Press reported.

Powell also made it clear that more increases are likely. He indicated that half-point increases are likely to be considered when the Fed meets again in June and July.

“This isn’t the end of the increases,” Gundling said.

No ‘safe havens’

While the Fed has raised its key interest rate twice in the span of two months, interest rates remain low, analysts note.

Still, hospitals are dealing with a number of financial challenges right now, and the Fed’s action could add to those hurdles, said ​​​​Eric Jordahl, managing director of Kaufman Hall, a consulting firm.

Jordahl told Chief Healthcare Executive he anticipated continued market volatility. When the rate hike was announced on May 3, the stock market enjoyed its best day in two years, but those gains were wiped out on the following day.

With higher borrowing costs, and uncertainty in the markets, healthcare organizations face economic challenges on a number of fronts.

“There are no safe havens,” Jordahl said.

“They have operating challenges that are pretty significant,” he said.

Hospitals have been dealing with staff shortages and higher labor costs, as well as higher costs for key supplies. Just as inflation is hitting American consumers, hospitals are dealing with higher expenses on everything from building supplies to foods, analysts note.

“The operating challenges are probably even more significant than what’s going on in the investment markets,” Jordahl said.

Hospitals have been dealing with negative operating margins for the first three months of the year, Kaufman Hall reported.

Health systems faced serious financial headaches at the beginning of 2022, due to record COVID-19 hospitalizations with the Omicron variant. Hospitals were forced to delay services and procedures due to staffing shortages and the need to preserve resources. Hospitals are rebounding as coronavirus cases have dropped and more surgeries and procedures are being scheduled, but they still face a long recovery.

“We’re in for a pretty rocky stretch,” Jordahl said.

With the higher costs, some hospitals still don’t have the volume they saw pre-pandemic.

Plus, even in the pandemic, hospitals were buoyed by the fact that their investments were doing well. With the stock markets down this year, health systems have one more challenge.

“The revenue side still isn’t rock solid,” Jordahl said.

Fears of a recession

While the Fed is aiming to reduce inflation, there are concerns that the economy could go into a recession.

A recession would add to hospitals’ financial headaches. Unemployment nationwide remains very low, but if a recession leads to bigger job losses, more Americans could lose insurance. Some may delay seeking treatment if they don’t have insurance because they are out of work, analysts said.

The Fed’s recent action shouldn’t be the deciding factor in whether or not a hospital or health system moves forward with a building project or expansion, Gundling said.

Healthcare systems certainly have to factor in higher borrowing costs. But healthcare leaders are typically looking at needs 10 or 20 years down the road. If a hospital is in a growing area and it was looking at building expansion before the Fed’s moves, Gundling said, “If the population is growing, it probably still makes sense.”

However, the higher borrowing costs will pose problems for smaller hospitals and health systems that may not be as financially sturdy as larger organizations, Jordahl said. It’s also more difficult for those smaller providers to generate revenue.

“The challenges are going to probably be greater for smaller and lower rated organizations,” he said.

It remains to be seen if higher borrowing costs could also delay any mergers or acquisitions in the hospital and healthcare sector.

Gundling didn’t anticipate higher interest rates delaying any deals.

“You don’t do it because it’s easy to borrow the money,” Gundling said. “You definitely factor that in. You still have to make sure it makes sense.”

“You should always merge because it’s the right strategy,” he said.

As more healthcare organizations face daunting financial problems, it’s possible more deals could happen, Jordahl said.

“Some organizations will look at it and say they don’t have the resources to get through these challenges and need to go to bigger organizations,” he said. “It’s entirely possible that it accelerates merger activity.”

There were only a handful of hospital mergers in the first quarter of the year, but analysts expect more deals as the year progresses.