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:

  1. investigate services that can accelerate receivables on hospital insurance claims
  2. retain competent ICD-10 consultants who are capable of assessing historical claims, ICD-10 impacts, clinical documentation of medical necessity
  3. ( Use analytics to provide dashboards that help the CFO visualize reimbursement risks and opportunities to prioritize the ICD-10 transition activities and investments
  4. 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.

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