At the end of fiscal year 2012, it had nearly $122 million reserved. That fell to $108.9 million on Dec. 31 and to $93 million as of March 31. And, Carver pointed out, that money remains the medical system's, and it earns interest on it.

When the collateral requirements fall, that reduction is recognized as income. When it rises, it reduces the system's income.

The need to post such collateral has hammered some institutions, resulting in significant losses and layoffs. South County Hospital in Wakefield, R.I., was forced to cut jobs a few years ago after it had to give $12.7 million to Merrill Lynch & Co. after a swap backfired, according to a Bloomberg News story.

Johns Hopkins Health System said in a statement it used interest rate swaps in the past to "turn variable rate debt into a more predictable fixed rate." It entered into its last swap in 2007 and said recent lower interest rates have enabled it take advantage of traditional fixed-rate financing.

Like UMMS, Hopkins is still invested in past swaps and puts aside money each quarter it can't touch in case it defaults on its swap agreement. The system posted $103 million of collateral in the third quarter of its 2013 fiscal year ended March 31.

While Hopkins has more exposure than UMMS, the union contended that Hopkins is a larger, more lucrative system that can better afford to put aside collateral. Hopkins posted operating income of $208.5 million in its 2012 fiscal year, while UMMS reported $71.7 million.

MedStar Health, which declined to comment about its use of swaps, has much less money tied up in the financing mechanisms than Hopkins or UMMS. At the end of March, the medical system had no collateral posted.

Little was known about swaps when hospitals and other companies began using them, said Jeff Bauer, an independent Chicago-based medical economist and health futurist.

Swaps were one of many risky financing tools companies used when the economy was booming, Bauer said. Many hospitals around the country lost money on the agreements when interest rates didn't rise.

"There were pretty aggressive financial decisions made over the last 10 years based on the fact that things would always be good," Bauer said.

Entities can pay to cancel swaps, but it's costly. At the end of March, UMMS could have paid $183 million to cancel its contracts, and Hopkins would have had to pay nearly $233 million. MedStar only would have had to pay $20.3 million.

Analysts said there is no rule on whether a company should take the financial hit to get out of a swap or hold onto the agreement until interest rates are more favorable.

UMMS' swaps still could pay off if interest rates rise steeply before the underlying bonds come due. The system has no plan to terminate them, Carver said.

She also insisted that the swaps did not influence cost-cutting decisions at the system, including layoffs this summer at its main campus in Baltimore. She said hospital rates, which are set by a state board in Maryland, and Medicare payments have hurt hospital revenue. Hospitals are also seeing patient volume decline as medicine moves to a model focused more on outpatient care.

"All hospitals in the state have been required to do more with less," Carver said. "Our situation is no different than most hospitals in Maryland and across the country. The goal is to provide excellent patient care while remaining efficient and financially viable."

andrea.walker@baltsun.com

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