Joseph Krist
Publisher
We hope that you all enjoyed the holidays. Now that you’re back from various Spring breaks, so are we.
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ISSUE OF THE WEEK
$647,955,000
Clark County, Nevada
General Obligation (Limited Tax), Series 2018A
Moody’s: Aa1
This general obligation bond is secured under the typical full faith and credit pledge, subject to Nevada’s constitutional and statutory limitations on overlapping levy rates for ad valorem taxes. The bonds are additionally secured by incremental room taxes legally dedicated by statute under Senate Bill 1 to fund the public portion of constructing a new stadium to host a National Football League (NFL) team. The pledged room tax rates are 0.88% within the Stadium District’s Primary Gaming Corridor and 0.5% elsewhere within the district.
This reflects the use of the proceeds to finance costs associated with full faith and credit pledge, subject to Nevada’s constitutional and statutory limitations on overlapping levy rates for ad valorem taxes. The bonds are additionally secured by incremental room taxes legally dedicated by statute under Senate Bill 1 to fund the public portion of constructing a new stadium to host a National Football League (NFL) team. The pledged room tax rates are 0.88% within the Stadium District’s Primary Gaming Corridor and 0.5% elsewhere within the district.
The proceeds will finance a substantial share of the public portion of the costs to construct the stadium project for the Oakland raiders NFL franchise as well as fund a deposit to the bonds’ debt service reserve account. The stadium project is being overseen and managed by The Clark County Stadium Authority, a discreet component unit of the county which will also own the facility.
The County economy shows steady improvement on a statistical basis over each of the last four years. Employment, personal income, and home prices are all showing strong growth. Clearly there remains a concentration in and dependence on the hospitality industry which leaves the economy vulnerable to a national economic downturn.
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WHEN IS INSURANCE NOT INSURANCE?
Iowa Gov. Kim Reynolds signed a controversial bill allowing sales of health coverage exempt from state and federal regulations, including the Affordable Care Act. The bill, Senate File 2349, will allow Wellmark Blue Cross & Blue Shield to partner with the Iowa Farm Bureau Federation to sell a new type of health policy. The bill defines the new coverage as not technically being health insurance. It won’t be regulated by the Iowa Insurance Division and it won’t have to comply with rules under the Affordable Care Act.
Wellmark and the Farm Bureau could resume denying coverage to applicants if they have pre-existing health problems, such as diabetes, high blood pressure or a history of cancer. Such denials have generally been banned since 2014 by the ACA. The bill also would let Wellmark and the Farm Bureau delete some types of coverage, such as for maternity or mental health care, from the new coverage.
Medica is a Minnesota-based insurer that is the sole carrier selling individual policies in Iowa this year. Medica leaders say it would be unfair to exempt the Farm Bureau and Wellmark from government regulations but require all other carriers to follow them. The bill is alleged to have been written specifically to allow Wellmark Blue Cross & Blue Shield to underwrite the policies.
It will be determined by the Farm Bureau as to what benefits will be offered in the new plans and how they will deal with applicants with pre-existing health conditions. The bill also allows small businesses to band together to buy “association health plans,” which could provide lower premiums for employees than the businesses now are offered on their own. Both of these ideas were floated in the Congressional debate last summer over healthcare “reform”. If the plans are allowed to stand, it would likely create higher costs for the seriously ill in Iowa by allowing them to insure only healthy customers.
The plan anticipates that the Trump administration will not challenge the changes. The precedent for this hope is a program run through the Tennessee Farm Bureau, which began decades ago and has continued under the ACA without ever being challenged by the federal government. No one noticed until the individual mandate was repealed. Now that it has been, it is thought that more consumers may be attracted to similar plans.
Overall, these are not helpful developments for providers in Iowa. They would drive more patients requiring higher levels of care into a system without the requisite resources to pay for them. This would occur at the same time that state resources will likely be strained as Iowa is one of the states that would see their economy seriously impacted by the effects of limits on trade. So the likelihood is that overall, the health system in the state will see fewer resources available to treat its most acutely ill and economically less well off patients than was the case before. Should trade barriers such as tariffs be implemented, the resulting economic damage anticipated to occur in Iowa would only increase the impact.
COMPREHENSIVE INFRASTRUCTURE PLAN FADING – A CREDIT NEGATIVE
A variety of signs point to the likelihood that the federal approach to infrastructure will be piecemeal at best and likely tailored to a particular set of interests. They include indications that federal legislation will consist of several distinct pieces, rather than one fully committed and funded approach. There are also clues that the shift towards privatization as a centerpiece of any plan will continue if not increase.
This week, Speaker Ryan commented support for public-private partnerships and other ways of getting non-governmental sources to help pay for infrastructure needs. “All these infrastructure problems we have in America, there’s no way we can tax you to pay for all of it,” he said. “It’s not possible.” He added: “We’re going to have to think of more creative ways to get the private sector dollars involved in infrastructure, and whether it’s asset recycling or other kinds of creative ideas like that, with the right rules in place for the public good, I think it’s all good.”
We highlight his specific reference to asset recycling and this week’s announcement that DJ Gribbin, President Trump‘s infrastructure policy adviser, is departing the White House. Gribbin will be better positioned to advance the “recycling’ concept in the private sector. He previously worked for asset recycling’s leading champion – the Australian bank Macquarie Capital. Macquarie has been looking for more receptive audiences for the concept after a mixed record and dwindling support for the concept Down Under. The move out of the White House is a sign that Congress is not as receptive to an overall infrastructure plan as once may have been the case.
We think that there is a substantial role for the private sector in any infrastructure plan especially in the design, building, and management of many infrastructure projects. We do understand the reluctance to convert fully paid for public assets into privately owned and operated assets the operation of which is designed to generate a profit. We hold the view that the contribution of the private sector is best directed at efficiency and economics. The achievement of reasonable rates of return for the private sector is not inconsistent with retention of ownership by the public sector. We would cite airports as a good example of a sector which lends itself to private participation.
What would be credit positive for municipalities and authorities is an infusion of funding. Too much of the debate has been about financing. Our view is that financing is not the problem – there is no shortage of ideas. It is funding to help the entities already under pressure to fund existing and steadily increasing expenditures away from capital needs which would be the most helpful answer.
SUTTER HEALTH FACES STATE LAWSUIT OVER COMPETITIVE PRACTICES
WHY IT SHOULD MATTER TO ALL INVESTORS
In our most recent issue of the MuniCreditNews (3/26/18), we discussed the credit of Sutter Health in our issue of the week section, highlighting the system’s plans to use taxable debt to economically refund outstanding tax exempt debt. In the interim the System has found itself named as defendant in litigation brought by the state of California citing illegally anticompetitive practices by Sutter. The suit comes in the midst of Sutter’s efforts to market the aforementioned debt.
California Attorney General Xavier Becerra announced the filing of a lawsuit against Sutter Health, the largest hospital system in Northern California, for anticompetitive practices that result in higher healthcare costs for Northern Californians. The action aims to stop Sutter Health from unlawful conduct under state antitrust laws.
The complaint alleges that Sutter Health engaged in anticompetitive behavior. These illegal practices resulted in higher prices for health care in Northern California by: establishing, increasing and maintaining Sutter Health’s power to control prices and exclude competition; foreclosing price competition by Sutter Health’s competitors; and enabling Sutter Health to impose prices for hospital healthcare services and ancillary products that far exceed the prices it would have been able to charge in an unconstrained, competitive market.
The University of California Berkeley’s Petris Center on Health Care Markets and Consumer Welfare has issued a report which it says documents how the rapid consolidation of healthcare markets in California has led to rising healthcare costs for consumers throughout the state. Market consolidation in Northern California was especially glaring. The cost of the average inpatient hospital procedure in Northern California ($223,278) exceeded that in Southern California ($131,586) by more than $90,000.
The AG complaint cites a variety of studies conducted over several years to support his determination of anti competitive practices. A 2008 U.S. Federal Trade Commission retrospective study of the merger of Alta Bates, owned by Sutter, and Summit Medical Center found that the contracted price increases for Summit following the merger ranged from approximately 29% to 72% depending on the insurer, compared to approximately 10% to 21% at Alta Bates, and that the Summit post-merger price increases were among the highest in California.
The AG asserts that since at least 2002, Sutter has compelled all, or nearly all, of the Network Vendors operating in Northern California to enter into unduly restrictive and anticompetitive written Healthcare Provider agreements that have: established, increased and maintained Sutter’s power to control prices and exclude competition; foreclosed price competition by Sutter’s competitors; and enabled Sutter to impose prices for hospital and healthcare services and ancillary services that far exceed the prices it would have been able to charge in an unconstrained, competitive market.
The complaint further asserts that Sutter’s agreements with insurance vendors force Health Plans to include all Sutter hospitals and Healthcare Providers in their Healthcare Provider Networks—even those Sutter hospitals and providers that are located in areas where it would be far less costly to assemble a Provider Network using Sutter’s lower-priced and/or higher quality competitors instead of Sutter. That the agreements require that Sutter’s inflated prices for its general acute care hospital services (including inpatient and outpatient services) and ancillary and other provider services may not be disclosed to anyone before the service is utilized and billed.
Collectively, Sutter’s anticompetitive contract terms unreasonably restrain price competition among general acute care hospitals, between hospitals and ambulatory surgery centers for outpatient surgery services, and between hospital and non-hospital ancillary service providers, in Northern California and enable Sutter to price its general acute care services (including inpatient and outpatient services), and ancillary and other provider services at artificially inflated levels, according to the complaint.
Sutter is the largest provider of general acute care hospital services and ancillary services in Northern California. In 2016, Sutter had 193,161 hospital discharges, 873,992 emergency room visits, and 8,763,470 outpatient visits. 54. Sutter provides healthcare services to individuals in more than 100 Northern California cities within the following counties: Yolo, Sutter, Yuba, Nevada, Placer, El Dorado, Amador, Sacramento, Solano, San Joaquin, Stanislaus, Merced, Contra Costa, Alameda, Santa Clara, Santa Cruz, San Francisco, San Mateo, Lake, Napa, Sonoma, Del Norte, and Marin.
So what is the contractual structure at the heart of the AG’s assertions? There are at least two contractual arrangements that must be in place before any prospective patient is able to use a particular hospital or other Healthcare Provider as an in network, healthcare employment benefit: a Network Vendor must agree to include the hospital or other Healthcare Provider in its Health Plan Provider Network at pricing levels established through contract negotiations between the hospital or other Healthcare Provider and the Network Vendor. The patient’s Employer or Healthcare Benefits Trust must contract for access by its Health Plan Enrollees to the Network Vendor’s previously assembled Provider Network.
A hospital can be a “must have” hospital. A “must have” hospital is a hospital that Network Vendors have to include in their provider network for that network to be commercially viable. A hospital can be a “must have” because of physician referrals, reputation, or the lack of alternatives in a geographic location. Likewise, other healthcare providers such as an ambulatory surgery center or physicians’ group could be a “must have” provider because of physician referrals, reputation, or the lack of alternatives in a geographical location. Ownership of a “must have” hospital or other healthcare provider can give a Healthcare Provider market power.
By requiring Network Vendors to sign contracts that are designed to interfere with the formation of competitive Provider Networks and restrict the incentives that Health Plans can offer their enrollees and restrain price competition, a hospital system like Sutter can improperly limit the ability of rival hospitals, rival Healthcare Providers, as well as rival Hospital Systems as a whole to compete effectively. In this way, Sutter can exert control over the prices for general acute care (including inpatient and outpatient services), ancillary, and other provider services paid by Employers and Healthcare Benefits Trusts.
At the core of the complaint is what is cited as Sutter’s All-or-Nothing Terms and practices and the other agreement provisions described below, Sutter illegally ties or bundles the price-inflated services and products available at Sutter hospitals located in potentially more price competitive markets to its entire network of other hospitals and providers (including Sutter “must have” hospitals and providers) forcing Self-Funded Payors and Commercial Insurance Companies to pay for services and products they do not want to offer their Health Plan Enrollees at prices that dramatically exceed the prices Sutter could charge absent the illegal tie or bundle.
Sutter ensures that its de facto All-or-Nothing Terms are effectuated by specific Excessive Out-of-Network Pricing Provisions in their contracts with Network Vendors (“Excessive Out-of-Network Pricing Provisions”). If an enrollee requires services at a Healthcare Provider that is not in his or her Health Plan (e.g., he or she gets into an accident and is taken to the emergency room of a hospital outside of his or her plan), the contracts between Network Vendors and the Healthcare Provider or Hospital System fix the rate at which that non-participating provider shall be paid.
In the absence of a specific contract rate, services at a non-participating provider are to be charged at a “reasonable and customary” rate, where under state law as well as federal law that rate is to be determined with reference to such criteria as in-network rates of rivals or Medicare rates. The preference for alternatives close to where patients live or work becomes even more acute as the need and urgency increase, e.g., a patient has a heart attack or a stroke. However, the out-of-network rates set by Sutter are excessive and render uneconomical any narrow networks that exclude that Hospital System or any of its members from a Network Vendor’s provider networks because of this need for emergency services.
So what does it all mean? The issue of consolidation and efficiency will be a keystone supporting the evolution of the healthcare delivery model in the US in the 21st century. How these issues are viewed, valued, and judged whether or not to be effective will be some of the primary determining variables in the assessment of creditworthiness. To the extent consolidation results in efficiencies and cost reductions to individuals and the system as a whole, the creditworthiness of hospitals and hospital systems is likely to be sustained and even improved. Should consolidation result in price gouging and inefficient markets and competition, many hospitals could find themselves in a weakened position which will benefit neither consumers not investors.
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