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How banks and law firms make millions from hospital debt

An illustration of a syringe on a graph going up.
Illustration: Rebecca Zisser/Axios

Not-for-profit hospitals are paying bankers, lawyers and other financial advisers hundreds of millions of dollars every year to help them with a relatively routine task: issuing debt.

Why it matters: Collecting debt fees from hospitals is a steady source of money for Wall Street interests like Goldman Sachs and Wells Fargo. But those costs could encourage hospitals to chase revenue through higher prices.

Our analysis: Axios looked at 21 debt deals this year involving not-for-profit hospitals. Hospitals often issue debt to fund new facility construction, buy new medical equipment or refinance old debt.

The numbers:

  • Hospitals paid banks, law firms, credit rating agencies and other financial advisers $70.1 million to handle their debt deals.
  • That represents about 1.3% of the total debt those hospitals issued, which is slightly below the median for the broader municipal bond market.
  • More than a third of that $70.1 million went to banks in the form of underwriting fees.

The big picture: Hospitals sold an average of $20 billion in tax-exempt bonds annually over the past nine years, according to HFA Partners. The total would be a lot higher if taxable debt were included.

That easily translates into $300 million per year for bankers and lawyers that manage hospital debt — a rounding error in what the U.S. spends on hospital care, but still a cost the health care system has to bear.

The big questions: What's spurring hospitals to issue debt, and how does it affect the public?

Not-for-profit hospitals don't pay federal, state, local or property taxes and often use tax-free bonds, so their debt deals are therefore very relevant to the communities subsidizing their businesses.

  • New buildings and equipment are useful marketing tools, and hospitals inevitably will use them to pay off their investments.
  • "Their goal is to maximize revenue, increase volume and increase price so they can afford the debt," said Ge Bai, a health care finance researcher at Johns Hopkins.
  • "Everyone likes to have the newest and fanciest toys. It might allow hospitals to attract doctors or reputation. Whether you’re getting improved effectiveness is an open question," said Thad Calabrese, a professor at NYU who studies nonprofit finances.

A few hospital systems from the analysis stuck out:

  • OU Medicine, an academic system in Oklahoma, topped the list by paying out almost $30 million to an array of firms, including Bank of America and Citigroup.
    • A portion of the $1.2 billion debt offering is going toward building a new inpatient tower, but in a statement, OU Medicine did not fully explain the necessity of the structure or whether hospital prices would go up to pay for it.
  • Sutter Health, a system in California that is facing lawsuits alleging price-gouging and anticompetitive behavior, paid out $9 million in fees to Morgan Stanley, Wells Fargo and others after issuing $1.4 billion of debt.
    • Svend Ryge, Sutter Health's treasurer, said in a statement the deal was "standard practice" and would have "no measurable impact to health care prices."
  • Hospital for Special Surgery, a high-end specialty hospital in New York City, hired Goldman Sachs as the lead underwriter for its $179 million debt deal. Michael Esposito, an executive at Goldman Sachs, sits on the HSS board as co-vice chair.
    • HSS spokesperson Monique Irons said the hospital does "not believe that there is a conflict of interest," and the firms were chosen as part of a "rigorous and meticulous evaluation process."
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