By Michael Arrigo
Warren Buffett divested of his firm’s stake in municipal bonds. When he invested originally, he made a bet that 14 states who were issuers would not be a default risk. We have discussed the reimbursement risk in hospital revenue bonds. Hospital revenue bonds (also known as “Medical” Revenue Bonds) have a risk based return tied to the hospital’s ability to earn and receive revenue. Unlike typical municipal bonds, hospitals have no authority to tax, so their value as a revenue bond is tied strictly to their ability to earn and receive revenue. In the 250 page prospectus we read for a recent hospital revenue bond issue, there was no mention of reimbursement risk associated with the upcoming ICD-10 standard, or other health care regulations….(continued below video below…)
Best practice recommendations:
- investigate services that can accelerate receivables on hospital insurance claims
- retain competent ICD-10 consultants who are capable of assessing historical claims, ICD-10 impacts, clinical documentation of medical necessity
- ( Use analytics to provide dashboards that help the CFO visualize reimbursement risks and opportunities to prioritize the ICD-10 transition activities and investments
- communicate with lenders regarding credit lines and the risk mitigation steps your firm is taking well ahead of time.
We discussed our findings with a leading bond trading firm 30 days ago. What WSJ missed in their video recap: 15% of many muni-portfolios are NOT municipality related bonds. They are hospital revenue bonds. Buffet is the leader; average investors will now scrutinize this point and perhaps review what this means in hospital bonds and what reimbursement risks such as ICD-10 may be driving risk in the future. Reimbursement risk and risk mitigation will impact hospital system’s future Weighted Average Cost of Capital (WACC). Those health care providers that perform ICD-10 assessments should have a lower WACC in the future.