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Surveys: Hospitals Face Capital Budget Woes

CHICAGO - A pair of recent surveys show that nearly half of nonprofit hospitals have postponed or significantly cut back on their capital budgets in light of economic woes, including increased difficulty in accessing the bond market.

Nine of 10 hospitals surveyed by the American Hospital Association said they were finding it harder "or even impossible" to access tax-exempt bonds and "other important sources of debt, such as banks and other financial institutions" in recent months, according to the AHA's recent survey entitled "Report on the Capital Crisis: Impact on Hospitals."

The survey also reported that 45% of hospitals had put capital projects on hold and 13% had halted projects that were already in process. The AHA surveyed 639 hospitals from December 2008 through Jan. 6, 2009.

Similar results were reported in a recent survey conducted by the Healthcare Financial Management Association, which showed that 53% of hospitals are holding off or substantially cutting back on new construction spending.

The reports' results are reflected in the relatively low number of tax-exempt health care bond transactions completed so far this year at a time when other issuers have largely returned to the market after last year's credit crunch. While a handful of higher-rated health care credits have started to enter the market recently, issuers rated lower than A have largely been nonexistent so far in the debt markets.

"The vast majority of hospitals report that borrowing funds through tax-exempt bonds - the main source of borrowing for most hospitals - is difficult or impossible," the AHA said in a release accompanying its survey. "The vast majority of hospitals that have postponed projects have delayed updating their facilities, while more than six out of 10 hospitals have put clinical and information technology projects on hold."

One of the difficulties facing health care issuers is securing bank enhancement for bonds, according to the HFMA. The report said 18% of financially strong, or "have," hospitals reported difficulty securing a liquidity facility, and 31% of "have-not" hospitals reported difficulty. The HFMA also noted that 30% of "have" hospitals reported a substantial increase in the cost of debt compared to 43% of "have-not" hospitals.

The decision to postpone capital projects stems from the difficulty in accessing capital as well as other fiscal pressures facing hospitals. Nearly half of the hospitals surveyed by AHA said they had postponed or cut back on capital projects, and 13% said they had halted projects already in progress.

For those hospitals, 53% said a "very important" factor in the decision to cut back on capital budgets was that the "usual sources of capital were unavailable." Another 27% said interest rates were too high, and 18% said their bond ratings were downgraded. Fifty-nine percent said a decline in value of reserves, including investment portfolios, played a role in the decision.

"The broader effects of the economic slowdown play into hospital capital decisions as uncertainty mounts, operating performance declines and the value of reserves falls due to stock market and other investment woes," the AHA said in its report. Of the hospitals that have postponed capital plans, 82% have put facilities projects in particular on hold.

The postponed capital projects represent the majority of the capital budgets for those hospitals, according to the survey.

Of those hospitals that delayed projects, 39% said they would need up to $10 million to complete the plans, while 23% said they would need up to $24 million, and 17% said they would need $50 million or more to complete the projects.

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