CHICAGO — Nearly half of nonprofit hospitals expect capital spending to rise over the next five years, driven primarily by a need to invest in information technology, according to a new survey from Fitch Ratings.
Forty-five percent of hospitals said they expect capital spending to rise over the next five years, 35% predicted it would remain at current levels and 19% expect it to decrease, Fitch reported.
Despite most hospitals saying they expect capital spending to rise or remain the same over the next five years, only 39% said they plan to issue new-money debt over the next two years.
Another 60% said they plan to refund existing debt, many to shed expiring letters of credit or decrease risk in their portfolios by shifting more bonds into a fixed-rate mode.
The refunding trend bodes well for bondholders, as it will likely increase their security and stability, Fitch said.
Larger, higher-rated systems are more likely to ramp up their capital plans than smaller providers, with expected cuts in Medicare and Medicaid the chief driver behind capital plans.
Surprisingly, the new federal health care law ranked low among the influences on capital spending.
New or upgraded IT systems are a top priority, while new inpatient facilities are the lowest priority, with 73% of hospitals saying their inpatient facilities were sufficient for the next five years.
The report, “Capital Expenditure Trends Among Nonprofit Hospitals,” suggests that a shift in hospital revenue bond volume, which has declined dramatically over the past two years amid a weak economy, could be on the horizon.
Nationally, hospital bond sales totaled $5.6 billion, with 80 separate issues, from January to April 23, 2012, according to Thomson Reuters. That’s slightly higher than the same period last year — $5.5 billion — but down by more than 50% compared to 2008, 2009 and 2010.
“A multitude of factors are influencing capital spending levels,” analyst Adam Kates wrote in the report. The uptick in spending and plans to shed debt portfolio risk will likely serve the sector well, he said.
Ninety-five percent of hospital officials said looming Medicare and Medicaid cuts were a moderate to great influence driving the shape and size of their capital plans. Another 92% said the shift from inpatient to outpatient settings was important, and 88% said other factors — including recent capital spending, threats to property tax exemptions and rising bad debt — were important.
Only 76% of officials said the implementation of the new federal law was a moderate to great influence on capital spending. That finding is contrary to industry speculation that implementation of the new law has kept spending down for the last year.
More than half of the providers that plan to issue new-money bonds are rated AA or A, and 63% have revenues greater than $1 billion. Of those who said they do not plan to borrow, 70% had revenues of less than $1 billion, Fitch said.
On the refunding side, 76% of hospitals said their motive was to achieve interest-rate savings, and 53% said eliminating exposure to bank liquidity facilities and renewal risk was a primary consideration.
“Given the current low interest rate environment and the volatility experienced in the financial sector since 2008, these findings are not surprising,” Kates wrote. “Many hospitals have indicated that concerns about the stability of banks and continued access to and pricing of liquidity facilities have led them to diversify their exposure to banks and to increase the fixed-rate exposure of their debt portfolios.”
