The rural community, about 110 miles (177 kilometers) northeast of Minneapolis, sold tax-exempt bonds to build the $26 million facility it opened last May. The hospital’s chief executive officer said that if its access to such low cost financing had been cut off it would have paid over $6 million more in interest.
That may soon be an expense that other hospitals across the country will have to shoulder. The House’s tax legislation revokes non-profit hospitals’ ability to raise money in the municipal market, where investors are willing to accept lower interest rates because the income is exempt from federal taxes. That’s threatening to saddle health care providers with higher borrowing costs at a time when their finances are already under pressure.
“Should tax-exempt financing not be available in the future, it may really harm our ability to build affordable senior housing and assisting living facilities,” said Michael Schafer, Spooner Health’s CEO.
For small, rural hospitals across the country, labor, drug, and technology costs are increasing faster than the revenue and patients’ unpaid debts are on the rise. Higher financing costs would be one more challenge.
David Hammer, head of municipal bond portfolio management for Pacific Investment Management Co., said the loss of the tax-exemption could raise borrowing costs by 1 to 2 percentage points at small facilities with a BBB rating or below. That “could have a meaningful impact on their balance sheets,” he said.
At least 26 non-profit hospitals are already either in default or distress, meaning they’ve notified bondholders of financial troubles that make bankruptcy more likely, according to data compiled by Bloomberg. That includes falling short of financial terms set by their debt agreements and having too little cash on hand.
Many of them are based in rural communities where the populations tend to be “older, poorer and sicker,” according to Margaret Elehwany, the vice president of government affairs and policy at the National Rural Health Association. She estimates that about 44% of rural hospitals operate at a loss. There have been at least seven municipal bankruptcy filings by hospitals since last year, the most of any municipal sector excluding Puerto Rico.
The risk that Congress will prevent hospitals from accessing the municipal market worries Dennis Reilly, the executive director of the Wisconsin Health & Educational Facilities Authority, an agency that issues debt for non-profits such as Spooner Health.
“All of us in the industry were completely blindsided by the House proposal,” Reilly said in an interview from Washington, where he was meeting with members of Congress about the proposed bill.
“Without tax-exempt financing, not-for-profits across the country will have increased borrowing costs of 25 to 35% because they’ll have to access the taxable market,” he said. “For many of the rural providers like Spooner, much of their project they would not have been able to do with the higher cost of capital.”