Hospitals have staved off payment defaults amid COVID-19 surge

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Even as California hospitals are the latest in the U.S. to be overwhelmed by waves of COVID-19 patients, the stress so far has not affected balance sheets to the point that hospitals have failed to pay bond debts.

There have been no bond payment defaults from non-profit healthcare systems since the pandemic took hold in the U.S. in March, though 12 have had impairments, three of which are in California, according to a Jan. 4 report from Municipal Market Analytics. MMA has a negative outlook on the non-profit hospital sector.

A healthcare worker outside a surge tent for COVID-19 patients at Huntington Hospital in Pasadena, California.

Fitch Ratings changed its outlook on the healthcare sector to stable from negative in December as news of imminent vaccine rollouts hit.

“What we were focused on is that we don’t believe there will be another national shut-down where hospitals are ordered to cancel elective surgeries,” Kevin Holloran, a Fitch senior director. “It varied from state to state as to how long they were shut down. That was the most difficult time for hospitals. We saw top line revenue drop 40% last spring.”

“We think the damage to topline revenues will be minimal,” Holloran said.

He added, however, that it is tough sledding in California right now.

“California is standing out right now, just like New York did at the beginning of the pandemic,” Holloran said.

California hospitals have been canceling or postponing elective surgeries amid a surge of COVID-19 patients.

News reports since early December paint a picture of full-to-bursting intensive care units, patients lingering on gurneys in hallways and ambulances being turned away by hospitals that can't handle the patients.

Complicating the problem are multiple reports of outbreaks among hospital staff.

On Tuesday, the Associated Press reported that California issued a public health order that hospitals throughout the state with room to accept patients need to allow transport from others that have maxed out on intensive care beds.

The public health order issued Tuesday, which will last three weeks, could result in patients being shipped to northern California from southern California and from the San Joaquin Valley, where 14 counties were ordered to delay nonessential and non-life threatening surgeries in order to provide beds, AP reported.

The majority of the hospitals that are being overrun with COVID-19 patients now are in California, Holloran said.

“We have seen on the news that in California they are converting office spaces, cafeterias and gift shops into places to put patients with COVID-19,” Holloran said. “In Becker’s Hospital Review, they reported that ambulance drivers were told if you can’t resuscitate a patient within 10 minutes don’t bring them to the hospitals.”

In Los Angeles County, currently the hardest hit portion of the state, there were 258 confirmed new deaths on Wednesday and 11,841 new cases of COVID-19, bringing the tally of positive cases across the county of 10 million people to 852,165 and 11,328 deaths, the Los Angeles County Department of Public Health reported.

“There are 8,023 people with COVID-19 currently hospitalized and 20% of these people are in the ICU,” the county health department reported. “On November 1, the three-day average number of people hospitalized with COVID-19 was 791. On January 4, the three-day average increased to 7,873. Hospitals are accepting more patients than they can discharge, and this is causing a huge strain on our emergency medical system.”

Barbara Ferrer, Los Angeles County’s director of public health, said “this is a health crisis of epic proportions.”

Positivity rates are now north of 20% in the county, where nearly 5 million people have been tested, she said.

“I am more troubled than ever before, and in part, my concern is rooted in the reality that it will take so much more for us to slow the spread given the high rate of community spread,” Ferrer said. “In Los Angeles County, we have doubled the number of people passing away each day, and this reality has upended all aspects of our healthcare delivery system.”

Though California hospitals have been canceling elective surgeries, which are more beneficial to a hospital’s bottom line than the labor intensive and expensive care required for COVID-19 patients, that is not the case in most states, Holloran said.

Treating patients with COVID-19 is more costly, because of the need for personal protective equipment such as masks and frequent gown changes, coupled with the additional cost of hiring temporary workers, premium pay and supplemental benefits, he said.

Though pressures on hospital systems across the country from the pandemic have as yet resulted in no bond defaults, 12 have reported impairments in bond disclosures, said Matt Fabian, an MMA partner.

And, three of the 12 hospitals that have reported impairments are in California, Fabian said.

Three of the 12 hospitals nationally that have reported impairments in bond disclosures are in California, said Matt Fabian of Municipal Market Analytics.

Marin General Hospital reported in a disclosure filing dated Dec. 3 that it would not meet its rate covenant under its master trust indenture, and that it would be hiring an independent consultant. Chinese Hospital Association, which runs an acute-care hospital in San Francisco's Chinatown, drew on reserves and the Beverly Community Hospital in Montebello fell below covenanted cash-on-hand requirements, Fabian said.

Nationally, the two largest healthcare systems to report impairments, were Ohio-based ProMedica, which has hospitals in 30 states, and Tower Health in Pennsylvania, the latter of which has $1 billion in debt, he said.

The impairments included having debt service level coverage fall below what was outlined in bond covenants, drawing on a line of credit, or even using money from CARES Act Paycheck Protection Program loans to make debt payments, all of which could trigger a technical default.

As healthcare operators issued debt in 2020, Fabian said, many wrote bond covenants to guard against such technical defaults by allowing for lower debt service coverage during a pandemic and allowing the ability to use federal loans to make bond payments.

Fabian partly attributed the lack of defaults to the $100 billion hospitals were allocated from the CARES Act and the $75 billion received through the Paycheck Protection Program and Healthcare Enhancement Act.

Higher costs for labor and personal protective equipment and lower margins “resulting from treating COVID-19 patients and the curtailment of elective surgeries will continue to pressure credits in the sector,” MMA analysts wrote in a report.

Larger systems and specialty hospitals will be more resilient, while single-site and rural facilities will face greater challenges, Fabian said.

“The disproportionately negative economic impact on lower and middle-income households — particularly higher unemployment — means a greater percentage of Medicaid patients and growing uncompensated care,” MMA analysts wrote. “Regional differences based on virus control are expected.”

Fabian pointed to both the federal funding and market access.

“I think the PPP loans that the feds gave out were enormously important in keeping hospitals out of default, as well as access to the bond markets,” Fabian said. “A lot of hospitals have been engaged in scoop or toss [where they refund debt into longer maturities to lower costs in the near term], or regular refunding transactions helped them pay for debt last year. Or they tapped lines of credit.”

Issuing debt in the bond market is sustainable for hospitals, but the forgivable PPP loans are not, Fabian said. If there are no more PPP loans or direct federal aid, or if hospitals keep using one-time funding sources that were not tapped out last year, the sector could see defaults, he said.

“We are still negative on the sector,” he said. “Americans as a whole are poorer and fewer people are employed. So the availability of private insurance from jobs is diminished. There could be more uncompensated care and charity care, which means more financial pressure in the near term. There will be some recovery and momentum, but the overall situation is still negative.”

Holloran said it is important to keep in mind in view of Fitch’s stable outlook that the not-for-profit hospitals that the rating agencies cover are fiscally-healthier investment grade systems, not necessarily the harder hit rural and one-off independent hospitals.

“If I take off my rating analyst hat and look at healthcare in America, I would have a more nuanced answer, because it is more challenging for hospitals that don’t have the financial wherewithal of larger hospital systems,” Holloran said. “If you Googled hospital closures in the U.S., a list of 50 or 60 hospitals would come up. But none of that is rated by us, because they are mostly small and rural, and were likely not operating from a position of financial strength headed into this.”

The rated universe is fairly well insulated, Holloran said, though he added it will be tough sledding for the next six months or so, until the U.S. hits 20 million a month or so of COVID-19 vaccinations.

Over the past decade, Fitch's outlook for hospitals have been stable or negative, but never positive, Holloran said.

“We ultimately ended up at stable,” Holloran said. “It’s hard to justify it getting a whole lot better given the third COVID-19 surge occurring now, but it’s not getting worse, because there is a vaccine."

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