Louis J. Stewart
New York University
Vincent Owhoso
Bentley College
Abstract: The explosive growth in derivative financial instrument use, often with a material and unexpected economic impact, has been well documented in the literature. However, the topic of derivative use by nonprofit hospitals and health systems has not yet been adequately addressed. We reviewed the audited financial statements of the 49 community hospitals and multi-hospital health systems operating in the state of New Jersey. We found that 8% of New Jerseys nonprofit health providers utilized interest rate derivatives with an aggregate principle value of $229 million. These derivative users combine interest rate swaps and caps to lower the effective interest costs of their long term debt while limiting their exposure to future interest rate increases. In addition, while derivative assets and liabilities have an immaterial balance sheet impact, derivative related gains and losses are a material component of their reported operating results. While these gains and losses have a zero cash flow impact, the total current cash flow impact and potential future risk associated with derivative use cannot be readily determined from the financial statement information.
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