Article
When management and boards are used to borrowing at 3%, interest rates above 6% may be uncharted waters for many.
Health system leaders are operating in an interest rate environment not seen in nearly two decades. Long-term and intermediate borrowing costs have risen sharply, changing not only how organizations finance themselves, but how they evaluate capital investments and their entire balance sheet. Five years ago, healthcare systems could finance growth initiatives for under 3% and lock that in for 30 years. Today, those same leaders are facing 5-6% rates, despite general credit improvement across the healthcare spectrum.
But debt costs are just one side of the coin. When factoring in cash earnings, fixed income returns, pension obligations, and swap values, many systems will find that their balance sheets are better positioned in today’s high-rate environment than they have been in years. Economic volatility is not likely to ease anytime soon, nor are operating pressures abating for health systems. However, a more holistic approach to managing the balance sheet may help turn liabilities into assets and better align the balance sheet with a system’s overall needs.
Borrowing costs have materially escalated in 2026
The 10-year Treasury yield has traded between approximately 3.5% and 4.75% since 2022 but recently broke out of that range to reach 5.3% by the end of September 2026. This increase of over 100 bps in just six months has pushed borrowing costs to levels many healthcare leaders have not seen during most of their careers.
Drivers of rate inflation
While no single factor has driven the increase in rates, long-term markets generally reflect inflation expectations, Federal Reserve policy, economic growth expectations, and overall market risk. Inflation concerns stemming from geopolitical tension and continued supply chain disruptions have led market participants to anticipate further upward action by the Federal Reserve. At the same time, increased competition for investment capital, particularly from significant AI-related opportunities, has contributed to this upward pressure on rates.
As rates include a component of risk, they tend to rise quickly but take longer to decline. Thus, rates are expected to remain near current highs over the next few months, with the potential of further uncertainty tied to the election or further geopolitical turmoil causing rates to rise even more.
While the Fed chose to leave the federal funds rate unchanged at its October meeting, a December Fed move is viewed as almost a certainty by the market with an additional bump expected in 2027. Market sentiment does change rapidly, but health systems may wish to consider preparing for the possibility of rates remaining elevated for the next twelve to eighteen months, if not longer.
The environment dictates the approach
The increased cost of capital for health systems is just one effect of higher interest rates, but finance leaders should not panic—leave that to the bond traders! A more useful first step is to assess the balance sheet on a holistic basis. For many health systems, the balance sheet is in a better position than it may seem. The same higher rates that increase the costs of variable-rate bonds and new fixed rate debt also improve cash yields; fixed income portfolios will be reinvested at higher rates; pension obligations will decline; fixed payer swap mark-to-markets will improve; and additional opportunities will arise in leasing and real estate portfolios.
Organizations should consider taking a strategic lens to their entire balance sheet, including:
Assessing the effect of higher interest rates on the balance sheet holistically can provide a much different answer than reviewing the debt portfolio alone and help management teams take a more coordinated approach to managing their entire portfolio of assets and liabilities.
Borrowing opportunities abound, though structures and approaches may be different
For health systems that still need to access external capital, leaders should not assume that financing approaches that were successful during lower interest rate environments will provide the same results now. A higher borrowing-cost environment requires careful evaluation of financing options rather than defaulting to continuing to issue long-term fixed rate debt. The market is already seeing a shift in borrowing vehicles within the healthcare sector.
When new debt is needed to fund capital projects, health systems still have several strategic choices. Regardless of the borrowing environment, there remains no universal recommendation for a capital structure regarding fixed-/variable-rate mix, product allocation, or the use of uncommitted structures. That said, when taking a holistic approach to the balance sheet, healthcare systems may find that they have significantly more capacity to add variable and intermediate term financing options than they may think. Organizations may consult their financial advisors to explore which option is most appropriate for their unique organization and market, but options include:
Health systems may be able to utilize alternative debt structures to minimize costs within risk parameters. However, an extended period of higher rates may also require a fundamental reassessment of capital investment and expectations for project returns. Just as homeowners facing 7% interest rates may need to choose lower-priced homes, projects financed at 6% will require materially higher returns or hurdle rates than those financed at 2.5% to 3% to be financially viable. While health systems should not overreact, as rates will continue to fluctuate, well-prepared systems should review projects with a renewed focus on project selection, expected returns, margins, and sequencing mission-driven investments. A rising rate environment changes the economics of funded projects by making it harder to generate positive returns, with additional implications for technology modernization efforts, including ERP implementations, AI initiatives, workforce investments, and facility expansion.
For many health system executives, today’s high borrowing-cost environment is a new experience requiring new approaches. Strong leaders should consider that a different set of practices and strategies is necessary to succeed in a higher borrowing-cost environment. Routine financing decisions may need to be replaced with more deliberate strategic analysis, and a holistic balance sheet approach may be necessary to ensure approaches are coordinated for all components of the balance sheet.
DISCLAIMER: This material is provided for informational purposes and reflects general market observations as of the date of publication. It is not intended to provide recommendations regarding any particular financing, municipal security, municipal financial product, investment strategy, or transaction. The appropriateness of any financing or financial strategy depends on an organization's particular circumstances, objectives, financial condition, risk tolerance, and other considerations.
Managing Director
Jeffrey Sahrbeck is a Managing Director for Kaufman Hall’s Treasury & Capital Markets practice. He advises healthcare leaders nationwide on Treasury and Capital Markets topics, including credit and capital management, external financing, treasury operations, treasury platform merger integration, and strategic resource allocation. Mr. Sahrbeck has worked in the industry for more than two decades and has experience with a wide...
Assistant Vice President, Kaufman, Hall & Associates, LLC
Michael Warden is an Assistant Vice President at Kaufman Hall and a member of the firm’s Treasury and Capital Markets practice. He provides analytical and quantitative support to not-for-profit hospitals and health systems nationwide, focusing primarily on tax-exempt and taxable bond financings, capital structure management, and credit positioning.
