Case study: RI hospital sees debt interest rise from 1 to 15 percent

When South County Hospital borrowed $52 million, it was back in the good old days of 2006, before the financial industry saw one of the worst crises since the Great Depression. At the time, the South Kingstown, RI-based hospital system was able to borrow the money at a reasonable 1 percent interest rate. The name of the game was auction-rate securities, a standard vehicle for hospital borrowing at the time.

Now, in the wake of the financial industry meltdown, auction-rate debt has gone toxic. Since that time, South County's interest rate has soared to 15 percent, which has added an additional $5 million annually in expenses to the non-profit community hospital's budget. Now, staggering under the additional debt load, the health system has been forced to ask state General Treasurer Frank Caprio for help.

To date, the hospital has coped by tapping its endowment fund, a step it took to meet the increased collateral requirements now associated with the loan. The hospital also laid off 20 employees and cut a total of $100,000 in pay for seven top administrators.

Still, the hospital saw a $2 million shortfall in its $100 million fiscal 2009 budget. Certainly, a drop in patient visits, a 20 percent loss in the value of its endowment and low health plan reimbursements all contributed, but the interest problem has been a major issue as well, said CEO Louis Giancola.

Caprio, for his part, doesn't seem to be offering much in the way of help, other than referrals to banks and insurance companies most likely to extend credit to a hospital--presumably to refinance the debt. Meanwhile, Giancola has retained financial adviser Oppenheimer & Co. to see if it can dig South County out of its hole.

To learn more about South County's dilemma:
- read this piece from The Providence Journal

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