By Heather Gillers & Melanie Evans

Kaweah Health paid more than $200 an hour for nurses during the worst of the pandemic’s upheaval. Pay rates have eased, but the Visalia, Calif., health system’s financial struggles persist.

High labor costs and financial losses have put Kaweah afoul of lenders, who demanded $18 million of its dwindling reserves as a guarantee for bondholders. To preserve cash, Kaweah closed a diabetes clinic and a nursing home that lost money. It hasn’t been enough to recover. Kaweah plans to ask the state for a loan. “We’ll get what we get,” Chief Executive Gary Herbst said.

Distressed hospitals are reporting they don’t have enough cash to satisfy lenders, which typically require borrowers to meet periodic profit and other financial targets. Lenders are demanding that hospitals hire consultants to help turn around their operations or set aside cash for repayment. Failures to meet such obligations to lenders can technically count as default, putting hospitals at risk of credit downgrades and higher interest rates.

To avoid that fate, hospitals are closing or scaling back unprofitable services, selling assets or cutting pay, temporary staff and jobs, according to hospital disclosures, credit analysts and financial advisers. Some have refinanced debt, submitting to today’s higher interest rates in exchange for new loan terms. Others have sought to negotiate with lenders for more time.

An unforgiving market is adding to the pressure. Investors’ appetite for municipal bonds used by nonprofit and public hospitals for financing of all kinds has waned in response to a Federal Reserve inflation-fighting campaign. Rising rates reduce the value of outstanding bonds, leaving bondholders wary of further losses and often less interested in buying new debt. That in turn is limiting hospitals’ access to credit, adding to borrowing costs and prompting lenders to play hardball.

The nation’s wealthiest hospitals largely emerged from the pandemic strained but still financially sound. Institutions now in trouble with lenders are more often solo hospital operators or small systems that entered the pandemic with less in reserves, hospital financial analysts and consultants said.

Hospitals have disclosed some kind of repayment difficulty for more than $10 billion in municipal bonds in the past 12 months, according to Municipal Market Analytics. Overall, about $12 billion in hospital bonds is impaired—nearly 4% of all hospital muni debt outstanding. That is the most in the past 15 years, including during the 2008-09 financial crisis.

So far, no borrowers have failed to make bond payments on the $10 billion; impairments tallied by Municipal Market Analytics are signs of trouble that sometimes precede payment default, such as when cash flow or reserves drop below an agreed-upon threshold. Around a third of borrowers who report such problems eventually fail to make debt payments.

Hospital cash plunged in recent quarters as institutions raised wages and paid a premium for temporary help, but revenue growth has lagged behind. Pandemic disruption to services and shortages of essential workers forced some hospitals to limit services, slowing growth. Hospital prices remained locked down under multiyear contracts with health insurers.

Doylestown Health would have breached its lending agreement in December, but lenders agreed to give the Pennsylvania hospital more time to raise cash, said its chief financial officer. Lenders last week agreed to new terms through 2024 to give the hospital more time to recover. Doylestown Health has reached a deal to sell its retirement community, which will bring an influx of funds to help meet debt obligations.

Overall cash levels at hospitals remain around where they were before Covid-19, which prompted a burst of federal aid. But rising labor expenses are eating into that cushion, said Richard Ciccarone, president emeritus of Merritt Research Services, a municipal credit-analysis firm.

Salaries and benefits amounted to more than 58% of the net revenue that hospitals collected from serving patients in 2022, according to Merritt data. That is the highest share in three decades except for 2020, the first year of the pandemic. Meanwhile, hospitals are reporting that revenue available to cover debt payments is at its lowest level in 30 years, except for during the 2008-2009 financial crisis.

The cash crunch is coming as lenders are less forgiving. For much of the past decade, households clamoring for tax-free yield snapped up hospital munis. Hospitals that ran into repayment difficulties often had little trouble selling new low-interest bonds to pay off their old debts, allowing them to push off payments or renegotiate other loan terms.

The tide turned last year when increasing interest rates slashed the value of outstanding bonds, putting off investors. In the first half of 2023, investors pulled about $7 billion from municipal-bond mutual funds, on top of more than $80 billion last year, according to Refinitiv Lipper.

Investors also have started demanding extra interest on the bonds of hospitals and other healthcare providers as cost pressures have mounted. Healthcare providers with a middle-investment-grade rating of A paid 1 percentage point more than top-rated borrowers on June 20, according to investment bank Raymond James. That is more than double the spread two years earlier.

Dan Solender, director of tax-free fixed income at Lord Abbett, which oversees $31 billion in munis, is taking a close look at the finances of lower-rated hospital issuers in the portfolio. Most hospital bonds are doing fine, he said. But for a few, “there’s a question whether we hold or sell.”

Banks, another buyer of hospital debt, are also backing away, shrinking their overall muni holdings to $567 billion in the first quarter from $580 billion as of Dec. 31, according to the Federal Reserve. Many regional banks are holding lots of older, lower-yield bonds, a phenomenon that contributed to the collapse of two of them and has left others with less bandwidth to take on new hospital debt.

Recently, said Abigail Urtz, senior vice president at broker dealer FHN Financial, “it’s been crickets. There’s zero banks buying.”