Health Care

Hospitals Ease Their Spending

CHICAGO — After a slow 2010, capital spending by nonprofit health care borrowers will likely remain low through 2015 amid a still-weak economy and the uncertain impact of the new federal health care law, according to Fitch Ratings.

Analysts also said they expect mergers and acquisitions to persist across the sector, and that they are monitoring whether other states will follow in the footsteps of Illinois, which recently stripped three hospitals of their property-tax exemptions due to insufficient charity care.

The comments follow Fitch's release last week of its 2010 median ratios report, which showed a solid operating performance year for the sector.

Liquidity ratios reached their highest levels since 2007 and profitability was unchanged from the previous year, Fitch said.

Like Standard & Poor's, Fitch maintains a stable outlook on the nonprofit hospital sector. Moody's Investors Service maintains a negative outlook.

The sector in general has struggled for the last few years from revenue and volume declines.

Hospitals across all rating categories have dealt with those pressures in part by cutting back on capital spending, according to Fitch.

"Three years ago, in 2008, capital spending was at a much higher level across all rating categories," analyst Jim LeBuhn said in a conference call Thursday. "We think spending will remain at those levels over the near term as opposed to moving back to the higher levels."

LeBuhn said he expects providers to hold down capital expenditures until 2014 or 2015, as they brace for the impact of the new federal health care law.

Median capital expenditures as a percentage of total revenue was 5.8% in 2010, down from 7.9% in 2008.

Spending declined in all ratings categories, though the biggest drop was in the BBB category.

"Capital investment in fiscal 2011 is expected to mirror fiscal 2010 levels, as organizations navigate through a sluggish national economy and the expected implementation of health care reform," analysts wrote.

At the same time — and "not surprisingly," Fitch said in the report — the median average age of a building increased to 10.2 years in 2010 from 9.8 years in 2008. It is now at the highest level since 2000, according to the report.

Median debt burden, which Fitch measures as maximum annual debt service as a percentage of revenue, saw slight decreases for all rating categories except AA, which remained stable at 2.6%.

Median debt-service coverage improved to 3.5 times from 2.9 times, an improvement due in part to reduced capital spending.

Meanwhile, LeBuhn said Fitch is watching closely the situation in Illinois, where the state revenue department last week stripped three large hospitals of their property tax-exempt status for failing to provide adequate charity care.

Hospitals rely on the perks that come with a nonprofit status, including the ability to issue tax-exempt debt, though that is not being threatened in the Illinois case.

States are increasingly examining property tax exemptions.

The Cleveland Clinic faces a similar lawsuit that could make its way to Ohio's highest court.

"This may be the year where the budgetary pressures are strong enough that it may become a bigger issue," LeBuhn said. "Clearly state and local governments are looking for additional funding sources. … I don't think that it's something that going to go away."

Days' cash on hand, or DCOH, a key measure of a borrower's fiscal health, reached its highest level in six years in 2010, Fitch said. The median DCOH increased to 180.5 in 2010 from 166.8 in 2009. Below-investment-grade issuers also saw improvement in this area, where DCOH rose to 97.7 from 76.6 in 2009.


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