ROBERT SIEGEL, host:
From NPR News, this is All Things Considered. I'm Robert Siegel. Hospitals are supposed to be the place you go when you're sick, but many hospitals are sick themselves, victims of the bad economy. Late last year, the rating service Moody's dropped its assessment of bonds issued by nonprofit hospitals from stable to negative. NPR's Joanne Silberner reports on how the credit squeeze is taking its toll on nonprofit hospitals.
(Soundbite of emergency room)
JOANNE SILBERNER: Five-year-old Jane Sullivan sits cross-legged on a bed at St. John's Hospital in the middle-class suburb of Maplewood, Minnesota. She's still in her plaid school uniform. Her forehead is nearly hidden by white gauze.
Ms. JANE SULLIVAN (Patient, St. John's Hospital, Maplewood, Minnesota): Because I hurt my head. I stepped on a puddle of ice.
SILBERNER: That fall resulted in a lot of blood.
Ms. SULLIVAN: It spilled on my jacket.
SILBERNER: Jane's father, Joe, picked her up at school after the nurse called. The last thing he wanted to do was drive miles and miles looking for an emergency room. St. John's is five miles away.
Mr. JOE SULLIVAN: This was not in Jane's plan today or my plan, so having an emergency room close is really important.
SILBERNER: It's quiet now on a weekday morning, but things can get busy at night and on weekends. About 40,000 people a year come through this emergency department, including, in the past couple of years, patients injured by a nearby tornado, a chemical spill and a bridge collapse. Sometimes the 22 small, sparkling-clean rooms aren't enough. About five hours a month, the hospital has to turn patients away. That's not good, says St. John's chief financial officer, Bob Gill.
Mr. BOB GILL (Chief Financial Officer, HealthEast Care System): That's our job, to be in the community, to serve the patients. So, when we have to turn them away, it's a very uncomfortable feeling.
SILBERNER: Which is why three years ago, the hospital began planning an extension.
Mr. GILL: The biggest thing was the emergency department, the fact that it was going on divert on a regular basis and we were putting a lot of stress into the occupancy of the hospital.
SILBERNER: So, hospital officials made $68 million worth of plans. Among other things, they'd build a bigger, more sophisticated emergency department. They wanted more obstetrics room, because sometimes the obstetrics department has to send women in labor to a hospital 10 miles away. They'd finance it the way many nonprofit hospitals finance construction: by selling tax-free bonds. A few years ago, the interest rate they would've had to pay was an affordable 5.75 percent.
Mr. GILL: We had a viable project; we had something that was going to meet the community's needs and, you know, enable us to provide comprehensive patient-care services to our constituents.
SILBERNER: But by the time the construction plans were finally ready a year ago, the economy was starting to tank. Investment banker David Johnson, who's not connected to St. John's, is an expert on hospital financing.
Mr. DAVID JOHNSON (Investment Banker; Hospital-Financing Expert): The hospital revenue bond market functioned supremely well up until August of 2007. At that time, we saw the first cracks in the performance.
SILBERNER: The cracks started in some of those complicated funding structures Wall Street was pushing, different kind of bonds than what St. John's wanted to offer. Those bonds were having problems because of how they were insured and because their interest rates periodically changed. And that scared buyers away from the routine, fixed-rate type of bond St. John's wanted to offer, a type of bond that usually sold easily. Meanwhile, bond holders were trying to get rid of what they had. All that created a classic case of low demand and high supply. It didn't look good to Bob Gill at St. John's.
Mr. GILL: At that point in time, we realized that, whoa, wait a minute; this is not the time to be issuing bonds.
SILBERNER: For St. John's Hospital, the 5.75-percent rate they were ready to pay rose to eight or nine percent by early spring of 2008, if they could sell the bonds. Each percentage point increase meant the hospital would have to pay an extra $680,000 a year.
Mr. GILL: So, we really did a quick stop and a quick halt to the project, and since things have gotten worse in the credit markets and so on from that point, we have pretty much put the project on a hold.
SILBERNER: The market got even worse after St. John's made its decision. It used to be that in a typical week, $4 to $8 billion in hospital bonds were sold. But from mid-September to the end of October 2008, the hospital bond market essentially closed down, says investment banker David Johnson.
Mr. JOHNSON: There were no sales.
SILBERNER: None?
Mr. JOHNSON: None.
SILBERNER: It's since come back a little, he says, but it's still very erratic. According to a survey this fall by the American Hospital Association, more than half of American hospitals have postponed or canceled capital improvements. Johnson says the only silver lining is that the bond situation helps limit overbuilding and unnecessary spending for redundant technology. Losing the chance to improve St. John's Hospital frustrates CFO Bob Gill.
Mr. GILL: It was a big disappointment to all of us that we were put into a position where we could not do something that we knew was the right thing to do. It's hard; it's, you know, it's uncomfortable. But you know, we have to do what we have to do, and common sense said don't do it and we didn't.
SILBERNER: Meanwhile, Gill has scraped together about a quarter of the money he had been after to do some modernization. And as for Jane Sullivan, who scraped her head? She got stitches put in and went home, her hospital wristband covered in the stickers the ER nurses gave her. Joanne Silberner, NPR News.