Plumas Hospital District chief executive Richard Hathaway just got a bitter taste of what the credit crunch means to California's hospital world.

His Quincy-based facility sold $3.2 million in bonds this week to start an expansion of its emergency, surgery and diagnostic imaging departments.

The 25-bed Sierra hospital will pay 6.9 percent in annual interest to its bondholders. "We were hoping for about 4.5 percent," Hathaway said.

The more a hospital pays to its bond investors, the less money it has left for patient care, new equipment and other programs.

Hospitals are feeling the sting of the credit crisis, according to John Landers, a Morgan Stanley managing director who recently briefed members of California's Health Facilities Financing Authority on the trend.

In a presentation to CHFFA, Landers said the market for long-term, tax-exempt California hospital bonds has undergone dramatic changes since financial institutions such as Lehman Brothers collapsed in September, making it far more expensive for health facilities to borrow money.

"At a time when the state has mandated a seismic retrofit for all hospitals, it's really difficult for us because we're a small facility and our margins are small," said Hathaway, whose hospital generated $38 million in revenue during its most recent fiscal year.

Jan Emerson, vice president of communications with the Sacramento-based California Hospital Association, said her group knows the credit crisis is hurting the hospitals, but how much is unclear.

"We're hearing anecdotal information about hospitals scaling back projects, facing higher rates or other credit restrictions," Emerson said.

Landers said the number of 30-year hospital bond issues has plummeted this fall.

To date, about $6.18 billion worth of hospital bond deals have been done this year, compared with $7.6 billion worth of financings in all of 2007, according to an analysis of California Debt and Investment Advisory Commission data. Experts say that only hospitals that absolutely need to will try to sell bonds anytime soon.

Investor demand also nose-dived. "It's profoundly different," said Landers, a 30-year veteran of the industry. "We used to go to market with a $300 million deal, we'd look for the investors, we'd find a price, commit it, we'd close the book and get it done.

"Now, we have to scramble around, find the investors, figure out what the rate might be and really size it according to investor demand."

Loma Linda University Medical Center's deal for $293.1 million in 30-year tax-exempt bonds last month illustrates what some hospitals face, Landers said.

An 822-bed acute-care teaching hospital 60 miles west of Los Angeles, Loma Linda had $921.6 million in revenue in 2007. Its patient revenues are down this year and its expenses are up, cutting profits by 37 percent, according to Fitch Ratings.

To raise cash, Loma Linda had to offer skittish investors an 8.25 percent interest rate. Landers called the rate "unbelievable."

"Cash-constrained hospitals can't really afford that," he said.

Just a few months ago, hospital bonds offered investors rates of only 4 percent or 5 percent, interest payments that are not taxed as income. Weeks after Loma Linda's bond issue, Providence Health & Services – a health system with a stellar credit rating – also sold $296 million worth of 30-year fixed rate bonds. The interest rate: 6.7 percent.

Landers said the only thing that has helped the market for hospital bonds has been a rise in individual investors looking for deals. They grabbed $60 million of Providence's $296 million issue, he said.

That's wasn't the case for the Plumas Hospital District.

Minneapolis, Minn.-based UnitedHealth Group bought the entire issue as part of a legal commitment to the state to support hospitals in rural, under-served areas following its acquisition of Pacificare in 2005. Had UnitedHealth not been a buyer, Plumas might have had to pay higher rates.

This is the second round of credit troubles for the state's hospitals this year.

In March, six of the state's largest hospitals, which had issued $4.6 billion in variable-rate bonds or securities, saw the market collapse and interest rates on the debt reset to much higher rates. California state Treasurer Bill Lockyer then announced an emergency program to help the hospitals refinance or convert to long-term fixed-rate bonds to ease the financial burden.

Lockyer said patients shouldn't have to suffer because of turmoil in financial markets.

Among those aided by the program was Sacramento's Sutter Health, which refinanced $625 million in debt, and Catholic Healthcare West in San Francisco, which refinanced $2.2 billion, documents from the Treasurer's Office show. Catholic Healthcare operates the area's Mercy and Methodist hospitals.

Call The Bee's Andrew McIntosh, (916) 321-1215.