Trend: Hospital investment returns still looking shaky

Though banks are gradually putting the subprime mortgage mess behind them, the financial markets are still in an uproar of sorts. That has meant bad news for hospitals, many of which have depended on investment income to fund their capital projects and keep liquidity strong. With the economy sliding downhill, stock market returns aren't doing well, with the Standard & Poor's index down about 20 percent at present from its October 2007 highs. Of course, the amount hospitals have invested in the stock market varies, but it would be hard to find a facility of any substance that doesn't have some equity holdings. And even the strongest hospitals and health systems have suffered. For example, consider the University of Pittsburgh Medical Center, which books about $7 billion each year and whose revenue has climbed 12 percent each year since 2003. Despite its track record, UPMC could do little to prevent its investment income from dropping 99 percent during the six months prior to December 31, 2007.

When stock investment returns begin dropping, not only do hospitals face cuts in capital budgets and liquidity issues, but also, they may run into worse troubles. For example, liquidity problems could violate their bond covenants or lower the rating on their debt, which can in turn make it harder for them to borrow and invest effectively. In other words, they could face a classic downward spiral.

Unfortunately for hospitals, they still don't have a lot of viable alternatives for making a return on their money. For example, they probably won't do well with fixed-income vehicles like Treasury bonds, yields for which have fallen from as much as 5.5 percent in 2001 to less than 4 percent today. And issuing bonds may not be an option, given the brutal drubbing they've gotten in recent months on auction-rate bonds. At minimum, it looks like some of those capital projects are going to have to wait.

To learn more about this trend:
- read this Atlanta Business Chronicle piece

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