As health systems’ balance sheets and labor forces are stabilizing, the health care bond market has rebounded. But uncertainty still reigns for Rhode Island health systems.
In 2024, health care bond issuances across the country more than doubled, reaching $35.6 billion, compared with the $17.7 billion issued in 2023, according to health care consulting firm Kaufman Hall.
And this is expected to continue through 2025 as more health systems continue issuing bonds for acquisitions or to expand and renovate existing facilities.
In Rhode Island, health care bonds dominated the issuances by the Rhode Island Health and Educational Building Corp., or RIHEBC, said Dylan Zelazo, executive director of the quasi-public agency. A majority of the $830 million in bonds the agency issued last year went directly to health care organizations, while other bonds indirectly boosted health care, such as funding for Providence College’s School of Nursing and Health Sciences.
The agency’s largest issuance in fiscal year 2024 was for $300 million to Brown University Health, formerly Lifespan Corp., to fund construction and renovation at both The Miriam Hospital and Rhode Island Hospital.
In addition, Brown Health received $400 million from two bond sales earlier this year to help pay off its purchase of two Massachusetts hospitals from Steward Health Care LLC. This is on top of a five-year, $100 million loan Brown Health received from Apollo Global Management Inc., the former lender of the landlord of the Massachusetts hospitals.
The health system’s bonds have drawn opposing outlooks from credit rating agencies. Fitch Ratings gave the bonds a negative outlook, while S&P Global Ratings held a stable outlook. Both agencies gave the bonds a “BBB+” rating, which is considered “good credit quality.”
Fitch’s negative outlook was more of a formality to acknowledge that Brown Health closed on a major transaction and must integrate two new hospitals, said Marianne Kennedy, treasurer for Brown Health.
Overall, the bond ratings for Rhode Island’s health systems are in the “B” range, below the national average of an “A,” said Cynthia Keller, an S&P credit analyst.
The state’s aging population and limited growth means more patients rely on Medicare and Medicaid, which can be costlier for hospitals. Also, rocky relationships with unions can turn lenders away, as there’s a higher risk of strikes and expensive contracts, Keller said.
Still, the ratings are aided by the fact that Rhode Island has relatively less competition as hospitals have closed or merged, making it crucial for the existing ones to survive.
Indeed, about $165 million in additional bonds are planned to be used this year to finance The Centurion Foundation’s purchase of Roger Williams Medical Center in Providence and Our Lady of Fatima Hospital in North Providence – which together comprise the CharterCARE Health Partners hospital system – from the bankrupt Prospect Medical Holdings Inc., which owned and operated the CharterCARE system.
S&P assigned a “BB-” rating for the RIHEBC-issued bonds, with a negative outlook and a 1-in-3 chance of a ratings downgrade within a year. This is a non-investment grade, or junk bond rating, making it a riskier investment.
Zelazo declined to talk specifically about the CharterCARE bonds, but he said some transactions are bound to be riskier than others and it’s the agency’s job to provide investors with the information they need to decide whether to invest.
“We need to focus on providing clear, transparent information to the bond market,” Zelazo said. “If we’re out there marketing a transaction, it should be a viable transaction.”
He acknowledged the market is volatile and interest rates have creeped up over the past few years. The agency has still had interest from investors in bonds, as they are seen as safer investments than stocks, he said.
For health systems, whether to issue a bond depends on how in need of the money the system is and what the interest rates are like.
CharterCARE’s case is challenging because the would-be new owner – that has reported losses in recent fiscal years – will have to spend more than $14 million to $15 million each year to pay off the acquisition, said James Bailey, associate professor of economics at Providence College. If the owner were to miss payments, this could cause more headaches for the health system in the future.
But for now, observers agree the funds are crucial to ensuring two safety net hospitals stay open.
A spokesperson for CharterCARE did not respond to a request for comment.
Brown Health’s purchase of Steward’s hospitals was also more urgent, meaning bonds were the most efficient way to get the necessary funds, Kennedy said.
The outlook on issuing debt isn’t always grim, Keller said. Funds from bonds are usually used for projects that will be revenue-producing in the long run. But it’s always a good idea to have another source of funding projects, such as through fundraising or cash.
Care New England Health System took this approach for its recent projects, including a new labor and delivery unit at Women & Infants Hospital. The upgraded unit opened in March and cost about $40 million, with $35 million coming from donors and the remaining $5 million from the health system’s budget.
With these funding sources, CNE didn’t need to enter the bond market in 2024, said Chief Financial Officer Todd Conklin, adding that CNE is looking to improve its finances and upgrade its credit rating before issuing more debt. This year, Fitch upgraded the health system’s 2016 bonds from “BB-” to “BB,” marking a “significant improvement” in Care New England’s creditworthiness for future debt.
