Some of the $100 billion of outstanding nonprofit hospital bonds could be endangered by passage of President Clinton's health-care reform plan because the plan probably would cause the collapse of financially weak institutions, a former Bush administration health official said last week.
Gail Wilensky, the Bush White House's health policy adviser, said that unprofitable community and rural hospitals in particular would have a hard time staying in business under a competitive managed care system such as that envisioned in the Clinton plan.
There is a widespread expectation among health economists, Wilensky said, that many small unprofitable institutions would fail under health reform, even though they would be provided with some temporary assistance under the Clinton plan, she said. Wilensky, who now works as a health economist with Project HOPE, spoke Friday at a health-care finance symposium sponsored by AMBAC Indemnity Corp. in New York City.
Big public hospitals that provide care for large numbers of uninsured individuals could also come under financial pressure, Wilensky said. Under health reform, the institutions may lose many uninsured patients, as well as the federal and state compensation they receive for treating them, she said. The loss of patients could occur because uninsured individuals, who would become fully covered under the Clinton plan and be free to choose among care providers, may seek services elsewhere.
Wilensky said she does not believe that the Clinton administration or other Washington policymakers, who have been concentrating on other aspects of the health plan, have considered the impact that the anticipated hospital failures could have on outstanding debt and bondholders.
"What will happen to those who are holding debt from public institutions that may not survive? I have not heard any discussion about that," she said. "There is a potential for real economic dislocation if we try to get from here to there too quickly."
"When it becomes painfully apparent" that bondholders could be hurt by the plan, Congress will probably try to correct the situation, Wilensky said.
"It won't go on for long," she said. "The pressure will be great to bail out those holding the bonds of public institutions threatened by health-care reform."
Christopher Conley, a senior vice president at Lehman Brothers attending the conference, estimated that $100 billion of nonprofit hospital debt is outstanding, with another $10 billion in debt issued by other institutions such as nursing homes and health maintenance organizations. About 56% of the total debt is held by individuals and 44% by mutual funds and other institutional investors, he said. About half the debt is insured, Conley said.
About a thousand hospitals have been classified as distressed by the HCIA, a health-care information firm, he said. Some of the distressed hospitals have outstanding debt, said Steven Renn, first vice president of AMBAC, but most are such weak credits that they have not had access to the capital markets.
Conley and other bond dealers at the conference said they don't believe the Clinton health plan addresses the outlook for outstanding hospital debt at all. A provision that would require states to set up guaranty funds to bail out insolvent hospitals and doctors appears aimed primarily at compensating the providers for any guaranteed services they would provide under the plan's universal benefits package, the dealers said.
The envisioned state guaranty funds do not appear designed to take over responsibility for the insolvent hospitals' outstanding debt, they said.
Wilensky said a widespread restructuring of hospitals and other health-care institutions would take place under the Clinton plan, which could bring fortune to some but disaster to others.
"There will be tough competition that will produce winners and losers. This will be a very difficult time," she said. "When the music stops, some players will not be left standing."
Some community hospitals will either merge or fail, Wilensky said, while hospitals across the board will have to adjust by, among other things, buying less high-technology equipment. Many hospitals, fearful of the prospects under health reform, will want to just "bury their heads in the sand" and hope the legislation doesn't pass, she said.
