News Column

St. Luke's plans to borrow up to $180 million

August 11, 2014

By Audrey Dutton, The Idaho Statesman



Aug. 11--The state's largest hospital system is about to ask investors for a nine-figure loan to pay for a wish list of potential additions.

St. Luke's Health System says it could use the money for projects such as a new hospital in Nampa, a new medical plaza in Twin Falls and the ongoing rollout of an electronic medical records system. The bonds also could help pay for an expansion of St. Luke's Downtown Boise campus -- a project expected to cost $300 million to $400 million.

After the bond issuance, scheduled for Tuesday, the system will owe more than $800 million. That's a 25 percent jump in its total debt load -- a lot for the health system to carry on its shoulders, two credit-rating agencies said.

The agencies, Moody's Investors Service and Standard & Poor's, downgraded the system's credit rating last week in light of the latest plans.

A ratings downgrade can affect the interest rate a business pays for newly acquired debt, similar to the way a person's credit score factors into the interest rate he gets on a mortgage.

St. Luke's executives decided to borrow this summer to take advantage of low interest rates, spokesman Ken Dey said.

"We expected that issuing bonds might impact our ratings with Moody's and S&P, but it's important to note that we are still an A-rated organization and the downgrades do acknowledge the financial strategy of issuing this debt as beneficial to the organization over the long term," Dey said.

He added that taking out fresh debt could free some cash, which St. Luke's could use to pay off earlier, higher-interest debt if it chooses. That might boost the system's credit rating again, he said.

It's not unusual now for a hospital to borrow money, said Todd Nelson, director of the Healthcare Financial Management Association.

Nelson said it's "key" that credit analysts gave St. Luke's a "stable" outlook.

"They're not necessarily overextending themselves," Nelson said. "A lot of times, frankly, the bond-rating agencies will downgrade people just because they're risk-averse."

WHO'S ON THE HOOK?

St. Luke's brings in about $1.5 billion in revenue per year. Most comes from Medicare and private insurance. The rest comes from Medicaid, people paying out of pocket and other sources.

Ultimately, the health system's bonds are repaid by consumers and employers.

Nelson said he can understand a patient thinking, "Oh my god, they just borrowed (more)," and assuming the new debt will drive up prices for lab tests or doctor's visits.

But it "doesn't necessarily mean they're going to get charged more for services," he said. Nelson added that he doesn't think St. Luke's debt will prompt major price increases, based on what analysts have said.

Nelson added that patients and doctors "rightly so" want hospitals to have the most up-to-date, powerful technology and equipment -- which means hospitals have to spend and borrow for capital investments, he said.

WHAT THE CREDIT RATINGS MEAN

The downgrade puts St. Luke's credit in the middle, or lower end of the middle, of its peer group. It's still well within "investment grade," as are nearly all health care organizations reviewed by Moody's and Standard & Poor's.

Moody's dropped St. Luke's rating a notch to A3, while Standard & Poor's dropped it a notch to A-.

Moody's said the new borrowing will add "stress to already fairly weak debt measures."

But its analysts also said St. Luke's is strong and stable: It's the largest health care system in Idaho, it has a good track record for handling money, its executives are experienced, turnover isn't a problem, and St. Luke's is likely to make reasonable financial decisions over the next five years.

Both agencies cited a downside to St. Luke's growth: the ongoing antitrust lawsuit over its 2012 purchase of Nampa'sSaltzer Medical Group, brought by two competitors as well as federal and state consumer-protection agencies. That dispute "supports the proposition that (St. Luke's) has a strong market position, but we also believe it could serve as a (potential) inhibitor to future growth plans," Standard & Poor's said.

Standard & Poor's health care analyst Robert Dobbins said the agency's rating takes into account how St. Luke's plans to use its newly borrowed money for capital projects.

"We take a pretty holistic approach to evaluating" a hospital's creditworthiness, looking at the overall direction of the health care organization, he said.

CHANGES IN INDUSTRY

Both agencies say nonprofit health care businesses are under stress.

Standard & Poor's says the businesses are "at a tipping point" -- trying not to lose money, patients or hospitalizations, despite industry shifts that make those losses more likely.

Moody's analysts have similar predictions. They cited "big expenses" such as technology and the expansion of physician practices, which are "important for drawing referrals," according to a November report. Meanwhile, new plans sold on health insurance exchanges will pay hospitals less, cutting into profitability, Moody's said.

"The sector as a whole will face weakening business conditions and contracting margins as not-for-profit hospitals adjust to changing dynamics brought on by the Affordable Care Act and (as) insurance companies, employers and other industry participants seek to control health care costs," said Daniel Steingart, a Moody's analyst.

Under Idaho law, nonprofit hospitals such as St. Luke's can borrow through the municipal bond market, where interest rates they must pay are generally lower than for other bonds. The Legislature created the Idaho Health Facilities Authority to sell the bonds.

Nonprofit hospitals such as St. Luke's can borrow through the Idaho Health Facilities Authority on the municipal bond market, where interest rates generally are lower than from other financing sources.

The authority, as of this year, has issued $2.5 billion of debt for health care organizations since its creation by the Legislature in the 1970s. The authority says it reviews the bonds to make sure they are adequate to pay for projects, without unnecessarily driving up health care costs.

Audrey Dutton: 377-6448, Twitter: @IDS_Audrey

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(c)2014 The Idaho Statesman (Boise, Idaho)

Visit The Idaho Statesman (Boise, Idaho) at www.idahostatesman.com

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Source: Idaho Statesman (Boise)


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