Ohio Treasurer Robert Sprague launched a program this week to bolster liquidity and ease the financial burden Ohio hospitals face because of the COVID-19 pandemic.
The state plans to buy up to $900 million in short-term debt that Ohio hospitals commonly issue to help fund their operations through a newly established Variable Rate Demand Obligation Stabilization Program.
This week, the state treasurer’s office began purchasing eligible VRDOs from participating Ohio health care systems and other critically important institutions to alleviate debt service costs.
“To care for the surge of patients and help prevent the spread of COVID-19, hospitals across Ohio are incurring a dramatic increase in costs,” Sprague said in a press release. “To make matters worse, the municipal bond market is at a virtual standstill and the market for VRDOs is under significant stress.”
Nationally, the VRDO market has been under pressure with rates jumping to levels not seen since the financial crisis in 2008, according to figures reported by the state.
Ohio hospitals have paid rates as high as 8% over the past week. As a result of this dislocation in the VRDO market, health care systems already feeling financial pressure face a spike in their debt service costs. The market began to open up late this week after a tumultuous, liquidity-driven pull back of investment dollars last week.
Hospitals will see some relief under $2 trillion coronavirus emergency relief bill the House passed Friday. Under the bill, health care systems would receive $130 billion, including $127 billion for a Public Health and Social Services Emergency Fund, according to a fact sheet.
“The impact the federal stimulus package will have on this market is unclear,” said treasurer's office spokeswoman Brittany Halpin. “The goal of the program is to provide stability to our healthcare systems during the period of disruption.”
Sprague said the VRDO program ensures that health care systems will receive a normalized interest rate during this time of crisis and are not “unnecessarily harmed by the disruption in the VRDO market,” he said. That will save the hospitals hundreds of thousands or perhaps millions of dollars in interest each year as they prepare for an influx of COVID-19 patients, he said.
Under the program the state is buying the debt, essentially loaning the hospitals up to $100 million each at 2% interest. To qualify, the health care system’s debt must be rated a minimum of A-minus or equivalent by at least one nationally recognized rating agency or otherwise be a lawful investment of state interim funds under the Ohio Revised Code.
"We're able to buy, from an investor perspective, really strong credits that we're comfortable with, while earning a 2% return," said Jonathan Azoff, the treasurer's chief of finance and senior counsel. "So that is a good return on the state treasurer's investment while simultaneously bringing down the borrowing rates. For some of these hospitals, they're going from 6.5% to 2%, so it's really meaningful for them. It's a situation that really is a win-win for both the treasury and for these health care entities."
The hospitals that have applied for the state lending program are: Bon Secours Mercy Health, Cleveland Clinic, Nationwide Children’s Hospital, OhioHealth, Premier Health and Summa Health.
“We applaud Treasurer Sprague for identifying this innovative and necessary solution that helps us continue to direct resources to the bedside so we can work to fulfill our Mission and care for all who come through our doors” said Deborah Bloomfield, CFO of Bon Secours Mercy Health.
