While Connecticut hospitals have been struggling to maintain healthy margins in recent years, it hasn’t sapped their appetite for taking on new debt.
In fact, some of the state’s 30 acute care hospitals have been aggressively borrowing funds to invest in new infrastructure and technology, make acquisitions or refinance existing debt.
In fiscal 2011 alone, Connecticut hospitals added $500 million in long-term debt, a 30 percent increase from a year earlier, according to financial records compiled by the state Office of Health Care Access.
That pushed the total statewide hospital debt load to $2.3 billion, and increased Connecticut hospitals long-term debt to capitalization ratio — a key financial metric that measures the amount of debt in an organization’s capital structure — six percentage points in just one year to 37 percent.
Among the most aggressive borrowers has been Hartford Hospital, which more than tripled its long-term debt load in 2011, increasing its borrowing levels from $62.2 million to $191.6 million.
Danbury Hospital saw its long-term debt increase more than three-fold to $252.1 million in fiscal 2011, from $81.3 million a year earlier.
And Norwalk Hospital saw its long term debt increase 293 percent from $15.7 million in fiscal 2010 to $61.7 million in fiscal 2011.
Industry officials say increased merger and acquisition activity, greater demand for services, pressure to adopt constantly changing technology and aging infrastructure have forced many hospitals to make significant investments or risk losing market share to competitors.
Low interest rates and cheaper construction costs have also made it more enticing to move forward with projects that may have been on the back burner for years.
“There has been an increased amount of bonding activity,” said Jeffrey Asher, executive director of The Connecticut Health and Educational Facilities Authority (CHEFA), the state’s quasi-public agency that issues tax-exempt bonds on behalf of nonprofit institutions.
CHEFA is involved in most debt issuances by Connecticut hospitals, whether they are traditional public bond offerings or private placement deals with banks.
Since nearly all Connecticut hospitals are nonprofit organizations they have access to tax-exempt bond issuances, which makes borrowing cheaper and more affordable.
Not surprisingly much of the recent borrowing has been led by the larger, expanding health care systems in the state.
About a year ago, for example, Hartford HealthCare issued $375.8 million in bonds. The move represented the first time the traditionally conservative hospital system tapped the debt markets. Prior to that, the hospital used cash from operations to fund capital projects.
Thomas Marchozzi, Hartford Healthcare’s chief financial officer, said the offering was part of a larger strategy to consolidate and then refinance the debt of all the individual hospitals, including Hartford Hospital, the Hospital of Central Connecticut, Windham Hospital and MidState Medical Center.
About 90 percent of the group’s collective debt at the time had variable interest rates, so the strategy was to refinance into less risky fixed rate debt when interest rates were at historical lows, Marchozzi said. Now, about 75 percent of Hartford Healthcare debt has fixed interest rates, and 25 percent has variable interest rates.
Hartford Healthcare also used about $110 million from the offering for new projects including the construction of a parking garage and expansion of the emergency department at Hartford Hospital.
About $40 million was set aside for capital expenditures at other hospitals within the system.
Marchozzi said Connecticut hospitals have traditionally been conservative in taking on new debt, especially to invest in facilities. But with increased competition and pressure from the federal government, which has begun tying Medicare reimbursement rates to patient satisfaction assessments, hospitals now are feeling pressure to upgrade their facilities, leaving them little or no choice but to borrow funds to improve emergency departments, invest in single-occupant rooms and add new technology.
“Hospitals in the state of Connecticut have traditionally been underleveraged because they haven’t borrowed money to invest in facilities,” Marchozzi said.
Yale-New Haven Hospital, the other large health care system in the state, added nearly $130 million in debt in fiscal 2011, pushing its total debt load to $616.5 million.
The financing package included a $40 million loan from Bank of America and $104.4 million in revenue bonds, which paid for the expansion and renovations of the hospital’s emergency department, the purchase and installation of machinery and equipment, and various other renovations and improvements to the hospital’s infrastructure.
Now Yale-New Haven Hospital is preparing to issue $232 million in additional debt, with $160 million being used to refinance debt borrowed for its recent acquisition of the Hospital of St. Raphael.
Hospitals have also been active in refinancing debt to take advantage of historically low interest rates.
There have been at least eight debt refinancing deals by hospitals in the last two years alone, according to CHEFA, most recently by Bridgeport Hospital, which refinanced about $36.2 million in June.
As hospitals become significantly more leveraged, there is a question of how much debt is too much debt.
With an overall debt to capitalization ratio of 37 percent, that doesn’t put Connecticut hospitals as a whole in an immediate danger zone, experts say.
A healthy ratio typically is in the 35 percent to 40 percent range, according to some estimates.
A lower percentage is desirable because it usually leads to lower interest rates or other more favorable borrowing terms.
Nonprofit hospitals that receive Standard & Poor’s top “AA” credit rating have debt to capitalization ratios in the 24 percent range.
Hospitals with a 37 percent ratio typically receive lesser but still quality “A-” to “BBB+” ratings by Standard & Poor’s. Such credit ratings are important because a better rating typically equates to lower interest rates, which can save hospitals significant money over time.
Yale-New Haven Hospital, which has a debt to cap ratio of 47.8, is currently rated “A+” by S&P, according to CHEFA.
Asher, the CHEFA executive director, said his organization will look at several financial metrics when determining a hospital’s credit quality, including operating margin, days of cash on hand and maximum annual debt service coverage ratios.
Asher said there is always a concern of hospitals overleveraging, but the need for infrastructure improvements is significant.
“There are a lot of aging physical plants, changes in medical technology, demand from patients for private rooms, and emergency departments that are too small,” Asher said.
But the debt to cap ratio is particularly important and varies significantly among individual Connecticut hospitals.
Derby’s Griffin Hospital, for example, has the highest ratio in the state at 298 percent, well above the state average.
Mark O’Neill, Griffin Hospital’s vice president of finance, said their elevated ratio has less to do with increased debt levels in recent years, than it does with a decrease in the value of the hospital’s unrestricted assets.
In fact, Griffin Hospital actually shrunk its long-term debt obligations last year by a little over $1 million to $48.5 million.
But the hospital’s pension valuation also took an $18 million hit — mainly because of poor investment performance and low interest rates — which shrunk Griffin’s total capital.
That significantly increased their debt to cap ratio, which is calculated by dividing an organization’s debt by its total capital.
Such a high ratio will likely restrict the amount of borrowing the hospital can do in the future.
O’Neill said Griffin Hospital, which is one of the few independent community hospitals still standing in Connecticut, doesn’t have immediate plans to issue more debt, but it is considering an expansion of cardiac and emergency angioplasty services.
The last time the hospital borrowed money was in 2005, when it issued about $25 million in bonds to refinance existing debt and pay for a new cancer center and the renovation and expansion of the emergency department.
“We are constantly reevaluating our debt and what we need to do to invest in the future,” O’Neill said.
Manchester Memorial and Rockville General hospitals each added about $2 million to $3 million in debt in fiscal 2011, pushing their long-term debt totals to $49.7 million and $25.9 million respectively.
Both hospitals, which are part of the Eastern Connecticut Health Network, have debt to cap ratios above the statewide average, with Manchester’s ratio standing at 80.4 percent and Rockville’s at 47.1 percent.
Michael Veillette, ECHN’s senior vice president of finance and information services, said hits to their pension fund valuation also impacted the hospitals’ ratio because it is eroding their unrestricted net assets.
He said he is not worried about the elevated ratios at either hospital, although ECHN is always reassessing the amount debt carried on their balance sheet.
ECHN makes about $9 million to $10 million a year in debt payments, he said.
Veillette said ECHN will typically borrow about $5 million a year in short-term financing to invest in new technology and automate certain services, particularly in labs to speed up the time it takes for test results to be completed.
But that borrowing doesn’t typically increase the overall debt levels by significant amounts because it replaces expiring debt, Veillette said.
ECHN’s last significant debt offering was a few years ago, when it bonded $15 million to help pay for renovations in the Manchester Hospital intensive care unit and expand a nursing home that is part of the ECHN system.
Access to capital for nonprofit hospitals has become more challenging since 2008, particularly for smaller independent organizations, Asher said.
That has contributed to some of recent merger and affiliation activity among hospitals.
Prior to the financial crisis, Asher explained, many public bond issuances were insured by bond insurance companies, so investors would purchase debt based on the credit ratings of an insurance company rather than the hospital.
But many bond insurers went belly up following the financial meltdown. As a result, bonds issued by CHEFA over the last few years have had to be based on the hospital’s credit rating, which may not be as strong as a highly rated bond insurer.
As a result some Connecticut hospitals, particularly small community institutions, are relying more heavily on private placement deals with banks, which are structured like commercial bank loans but with a tax-exempt interest rate.
