Einstein health network would triple debt to build Montco hospital

Albert Einstein Healthcare Network has long planned to stretch beyond its North Philadelphia neighborhood to capture more business from better-insured suburbanites.

In January 2006, Einstein teamed with Montgomery Hospital in Norristown to build a new hospital in central Montgomery County. After unsuccessfully pursuing a site in Whitpain, the two now hope to build a $360 million hospital in East Norriton.

On the face of it, the strategy makes sense. Currently, 67 percent of the Einstein health system’s revenue depends on government programs such as Medicare and Medicaid. Suburban hospitals see fewer patients covered by Medicaid and more toting commercial insurance.

But there are some risks. According to Moody’s Investor Service, Einstein intends to issue about $330 million in debt over the next 12 to 18 months to finance the hospital’s construction, which is expected to begin in 2009.

Moody’s says that would more than triple the health system’s debt. The good news is the bond-rating firm considers Einstein’s current debt load to be low. The network has $49 million outstanding from a line of credit with Wachovia.

And it’s looking to sell $90 million worth of fixed-rate bonds next week to refinance its part of the commingled debt of Jefferson Health System. That’s the last step before it can separate from Jefferson as of Oct. 1.

Einstein is financially healthy. Recent data collected by the Pennsylvania Health Care Cost Containment Council show the medical center had net income of $38.6 million on total operating revenue of $549.1 million.

But in a region that can hardly be considered underserved by hospitals, Einstein is jumping into a county that already has eight of them. While the 192-bed hospital (expected to open in 2012) essentially replaces one in Norristown, there’s no guarantee that it will take market share from its competitors.

Second, Einstein will have to ramp up cash flow to meet its higher debt payments. If the new hospital’s a hit, no problem. But what if the Obama or McCain administration takes a whack at Medicare to pay for war or peace? That blows a hole in the business plan.