CHICAGO - The ability to invest in cutting-edge medical technology will play an important role in the competitive health care market as the disparity grows between smaller, speculative-grade facilities and larger, higher-rated systems, say analysts at Standard & Poor's in a recent report.
The ability to spend money is increasingly important in the health care industry and hospitals with triple-B or lower ratings are more likely than higher-rated facilities to cut capital spending in the face of other financial pressures, said analysts Cynthia Keller Macdonald and Martin Arrick in the report, "Costly Medical Technology May Add a Further Wedge Between Not-for-Profit Hospital Credits."
Standard & Poor's expects downgrades to exceed upgrades this year after several years of generally positive financial performance.
"Over the last three or four years, we've really seen some improving financial performances in the industry, and people have spent a lot of money on their plants and earned a lot of money," Macdonald said in an interview yesterday. "Last year, we started to see some leveling off of financial performance, and the economy is going to continue to impact health care, and we're just going into a period when some hospitals are going into decline and some better-positioned hospitals will go into maintenance mode."
When it comes to capital spending, the ability to invest in cutting-edge medical technology is also emerging as a key to financial success, especially in competitive markets, according to the report. Although there are risks when buying technology - such as spending a lot of money on equipment that soon becomes outdated - in general the investment can mean an increased market share and the ability to specialize in certain niche fields.
"For the most part, the use of cutting-edge technology such as proton beam therapy for cancer treatment, magnetoencephalography brain scans, and robotic surgery has been concentrated at large academic medical centers and teaching hospitals," Macdonald wrote in the report. "However, it seems hospitals that can afford them are increasingly motivated to invest in such costly technologies in an effort to differentiate themselves among the competition."
Technology-based competition can become especially fierce in states without certificate of need regulations, which often serve to block duplication of technological services. In Michigan recently, for example, the CON board rejected a Detroit-area hospital's bid to build a proton beam cancer therapy center in partnership with a for-profit company. The ruling, which requires a change in the CON regulations, came after heavy opposition from other local hospitals, which said the new treatment center would set off an "arms race" among hospitals for the expensive new technology.
The ability to spend money and the average age of a facility are also important indicators of future success, and there too the credit quality gap between lower-rated facilities and higher-rated ones can be seen, said the analysts.
While a double-A rated provider generally has 250 days cash on hand, a typical speculative-grade provider is likely to have 50 days cash on hand with minimal liquidity - and faces greater challenges in accessing additional liquidity. The average age of a triple-A rated facility is roughly nine years, while the average age of a speculative-grade facility is about 13 years, according to Standard & Poor's.
"With the U.S. not-for-profit health care sector facing a barrage of incremental operational and financial pressures, credit quality is beginning to deteriorate and negatively affect ratings of speculative-grade credits, while many of the larger systems and better-positioned stand-alone providers perform very well," the report read.
Whether big or small, most health care systems are unlikely to embark on new major capital spending campaigns, at least in the near-term, Macdonald said.
"People are continuing with the plans they've had, most of which are years in the making," she said. "But they might be a little more conservative with capital dollars given the state of the market right now."
Meanwhile, the collapse of the market for auction-rate securities is unlikely to hurt systems over the long-term, according to Macdonald.
"We might see a short-term hit to the interest expenses if they had to pay more interest, and that might impact their earnings this year. But in terms of debt capacity, it's a wash," she said.
