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Recent turbulence across all fixed-income markets, including tax-exempt bonds, serves as a powerful reminder of the need for hospitals and health systems to consider the implications of a shift in outlook by the Federal Reserve Board. The Federal Open Market Committee (FOMC) introduced the prospect of a change in its outlook on June 19 noting a diminishment in downside risks to the economic outlook and labor market. Although the Fed’s announcement was not accompanied by any policy or interest rate changes, it caused a wide ripple effect that drove some interest rates up at levels not seen in several years. Market reaction to the news was swift. Yields in both the Treasury and swaps markets spiked almost instantaneously as the market sought to get in front of expectations of decreasing federal support.
The steep increases came at a time when the market already was in transition. Intermediate- and long-term Treasury and swap rates had been on the rise for several weeks and have continued to fluctuate as the market tries to anticipate a tapering of Quantitative Easing (QE). The Fed has indicated that it will begin scaling back its $85 billion-per-month purchases of Treasuries and mortgage-backed securities later this year, and make its final QE purchases in mid-2014, assuming that unemployment falls to 7 percent.
According to Fed Chairman Ben Bernanke during the June 19 press conference, “Our policies are tied to how the outlook evolves, and that should provide some comfort to markets because they will understand, I hope, that we will be providing whatever support is necessary.” The Fed also reiterated it won’t be increasing its short-term rates soon, and that an initial hike in those rates isn’t likely before 2015, when unemployment is forecasted to hit 6.5 percent.
In the weeks following June 19, Chairman Bernanke has been emphasizing the Fed’s continued commitment to all of the policies it has used to manufacture a low interest rate environment. Even so, these recent events may serve as a harbinger of the volatility that is likely to accompany a return to a “normal” Federal Reserve market presence. Consequently, hospitals and health systems should persist in monitoring the market. Those with variable-rate exposure in their debt portfolios likely will continue to see low floating rate costs for the foreseeable future, but those systems pursuing fixed-rate refinancings should be flexible and evaluate multiple financing products to ensure the best option. Organizations needing to borrow new money likely will see favorable variable rate pricing, albeit at slightly higher risk than traditional fixed-rate borrowing.
In evaluating derivative portfolios, hospitals and health systems bearing a lot of fixed payer swaps may actually benefit from a rising rate environment as the value of their portfolios improve. Organizations should continue to monitor their portfolios for opportunities to regain ownership of pledged collateral and—eventually—opportunities to terminate unwanted swap contracts. They also should monitor the market for opportunities either to decrease derivatives risk or to evaluate alternative structures that more closely align with the underlying portfolio.
Although low interest rates and market fluctuations continue to offer some attractive options for organizations seeking to strengthen their portfolios, remaining vigilant is essential. No one knows how long the era of record-low rates will continue, but June 19 reminds us that the end will come and that it could be fairly messy. To both maximize current opportunities and minimize future risks, organizations must closely monitor the evolving market and understand what capital structure levers they have at their disposal.
Josh Neaman is a vice president in the financial advisory practice of Kaufman, Hall & Associates, Inc., Skokie, Ill.
Publication Date: Thursday, July 25, 2013
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Jeff Chester, senior vice president and chief revenue officer at Availity, shares his thoughts on "Revenue Cycle 2.0" and how to best meet its challenges.
Mitch Morris, vice chair and global leader, healthcare, Deloitte, and Michael O'Rourke, senior vice president and chief information officer, Catholic Health Initiatives (CHI), share perspectives on the need for transformational IT in health care today.
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Brian Grazzini, CFO, HealthPort, describes the importance of efficient and compliant information exchange and audit management in helping HIM staff spend less time on paperwork and more on mission-critical projects.
Cindy Matthews, executive vice president, Community Hospital Corporation, discusses how rural and community hospitals can use collaborative partnering to position for success through tough market conditions.
Rick Heise, senior vice president, revenue cycle, at Cerner Corporation, discusses the importance of integrating clinical and financial data to excel in health care’s changing payment environment.
Russ Graney, founder and CEO for Aidin, and John Laursen, head of business development for Aidin, share insights on how to improve care transitions between acute and post-acute care settings and incentivize high-quality patient outcomes.
Scott Elston, strategic accounts manager, GE Healthcare Services, describes how substantial cost reduction in health care requires rethinking business strategy and asset use.
Robert Williams, MD, director, Deloitte Consulting LLP, and Arielle Freiberger, product strategist, ConvergeHEALTH by Deloitte, explain how sophisticated retrospective, real-time, and predictive data analytics can inform decision making to reduce costs and improve care.
Stuart Hanson, director of business development (healthcare solutions) at Citi Retail Services, discusses how improving the payment experience can benefit consumers and healthcare providers.
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