‘Epic’ losses hit hospitals-WEB ONLY

It ran into a wall of investment losses.

A case in point: Indianapolisbased Clarian Health suffered a whopping $633 million in losses on its investments and interest-rate swaps last year. That wiped out all the gains Clarian had built up since 2003.

As a result, it stopped construction on a building at its Riley Hospital for Children and delayed work on a hospital planned for Fishers.

Precipitous drops in capital levels have forced hospitals to preserve cash to maintain their stellar ratings on the debt they’ve used to finance a slew of new hospitals and outpatient centers. If they don’t, they could face a spike in interest rates or have a hard time refinancing borrowings set to come due soon.

“The investment losses at the end of 2008 were epic. Everybody was getting pounded,” said Ed Abel, director of Blue & Co., who serves as an accountant for numerous Indiana hospitals.

Meanwhile, the main business of Indianapolis-area hospitals has stayed healthy. Hospital executives say they saw a dip in early 2009, but things have improved since then.

However, some are nervous that their revenue could be pinched by a repeat of last fall’s frozen credit markets or another surge in unemployment. Indiana’s unemployment rate hit 10 percent in March, one of the highest in the nation. Rising unemployment boosts the number of uninsured patients hospitals see.

“What worries me more is another punch to the belly in the credit markets that would affect our local economy,” said Jack Horner, CEO of Major Health Partners in Shelbyville. “Our business is directly tied to employment. If we see unemployment go to 13 percent, our growth in pain will be exponential.”

Major and other county-owned hospitals in and around Indianapolis sustained more modest investment losses than the four large, private hospitals that dominate Marion County.

Clarian and Community Health Network each saw their investment portfolios lose one-third of their value last year. Clarian’s tumbled to $956 million, while Community’s fell to $350 million.

The parent organizations of St. Vincent Health and St. Francis Hospital & Health Centers also took a big hit, with their investment portfolios falling more than 20 percent as of Dec. 31.

‘Bizarre and unusual year’

Most of the hospitals’ investment losses are unrealized-meaning the value of their assets has gone down in the markets. But so long as hospitals don’t sell their investments, they can hope the value will come back up-the same hope most homeowners are holding for the depressed value of their houses.

Of Clarian’s losses, roughly a third-or about $200 million-were actually realized, said Chief Financial Officer Marvin Pember.

Of $250 million Clarian lost on interest-rate swaps that fell in value, Pember estimated $100 million of that value has come back as prices have recovered. Hospitals use interest-rate swaps to lower their interest payments on their debt and hedge against changes in interest rates.

“It was, without a doubt, the most bizarre and unusual year,” Pember said.

Clarian, which was the most aggressive at borrowing money and building new hospitals in the past decade, is now focused on cutting costs and “recapitalizing” itself, which is key to borrowing money in the future.

Clarian’s gains from operations were pretty good last year, rising 13 percent to nearly $56 million. And Pember said business is up again this year.

St. Francis Hospital & Health Centers had an even better year, posting an operating gain of $65 million.

Community Health has not formally released its 2008 financial results. St. Vincent Health’s results are combined with other hospitals owned by its parent organization, St. Louis-based Ascension Health.

Rethinking allocations

Greg Hahn, chief investment officer at Winthrop Capital Management in Carmel, said such large losses at hospitals stem from poor advice they received from investment consultants on how to allocate their invested assets and how to manage the risk of those investments.

“That is absolutely not acceptable,” Hahn said. Throughout the hospital and not-for-profit world, he said, “We ended up with a lot of bad asset allocation.”

But Pember and other hospitals defended their investment strategies as relatively conservative. Through last year, Clarian invested 50 percent of its money in stocks, about 25 percent in bonds and other “fixed-income” investments, and 25 percent in groups of hedge funds that invest in things like real estate and commodities.

This year, it reduced its stock holdings to just 25 percent of its portfolio and increased the other two classes.

“I would consider our strategy more conservative before 2008 than most,” Pember said. “It’s easy for people to say in hindsight, ‘coulda, shoulda, woulda’.”

Investment losses of 25 percent also prompted St. Francis Hospital to “pause” work on an expansion of its campus near Interstate 65 and Emerson Avenue.

“In a time like we have going on right now, we want to make sure we have a strong, solid balance sheet,” said Jennifer Marion, chief financial officer at Mishawaka-based Sisters of St. Francis Health Services Inc.

Unlike Clarian and St. Francis, Community has pushed ahead with a major building project-its $130 million expansion of its Community South Hospital.

“We looked at it long and hard, month after month after month,” said Tom Fischer, chief financial officer of Community Health. “We felt like we had enough debt capacity, cash on hand.”

Community did cut its $70 million capital budget in half this year-by delaying things like the purchase of a multimillion-dollar air exchanger at one of its hospitals.

Seeking stability

Both Clarian and St. Francis plan to restart construction on their hospital projects. But they want to get a sense of where the market is going first.

“When we have some stability, some rhyme or reason to the market, maybe we can feel a little more comfortable,” she said.

But for hospital executives to get comfortable, they also need to see steady streams of paying patients. They’re keeping an eye not only on the volume of patients coming in for health care, but also on how many of them have health insurance.

A rise in unemployment could increase the numbers of patients that can’t pay their bills, forcing hospitals to write off larger amounts of so-called “bad debt.”

“In all these cases, it’s really more the uncertainty in the economy,” said Abel, the hospital accountant.

Community Health said its amount of bad debt and free care jumped nearly 18 percent last year, to 6.7 percent of its total revenue. Major Health in Shelbyville has seen its “bad debt” rise 2 percent points in the last year.

Major also saw its in-patient visits drop 11 percent in January, compared with the same month the year before. St. Francis and Community said they saw similar drops.

But activity has bounced back up the past two months. Major CEO Horner said his hospital’s revenue is now up 2 percent for the year. Pember said Clarian has seen patient visits grow nearly 5 percent.

“I’m pleasantly surprised this year,” he said.