CHICAGO — Coming off a year that saw record-high capital spending by not-for-profit hospitals, the industry is likely to continue its spending spree this year even as it grapples with fallout from the bond insurance market, analysts said.
“The record-high level of capital expenditures is expected to continue until at least mid-November, assuming market problems are ironed out,” said Fitch Ratings analyst Jeff Schaub during a conference call yesterday that accompanied the agency’s release of a report on the 2008 outlook for nonprofit hospitals and health care systems. “Projects may be delayed but the factors that drove [spending] last year are still there.”
The health care sector’s growing appetite for capital spending led to spending ratios reaching 1.43 times in 2007, up from 1.38 times in 2006, said Moody’s Investors Services in its recent outlook report. Money spent on additions to physical plants and equipment increased to a median of $29.1 million in fiscal 2007, up from $28.6 million in 2006.
The spending will likely continue even as bond insurance companies continue to suffer rounds of write-downs and losses stemming from the collapse of the subprime housing market, analysts said. Bond insurance is common in the health care debt market, in part due to the widening credit gap between smaller, lower-rated or unrated hospitals and larger, higher-rated systems.
“It’s tough to quantify the impact,” Schaub said. “We’ve heard of a lot of projects getting delayed, and bond insurers are preoccupied with other things than underwriting hospitals. Projects are getting delayed but there is an expectation of being able to access the markets one way or another.”
The need for more sophisticated information technology systems is one factor behind the capital spending, analysts said. Investments in information technology account for 20% to 30% of total capital outlay in the sector, Fitch estimated.
Aging facilities, growing competition, and the desire to retain physicians with investments in up-to-date clinical facilities also drive capital spending.
The need for more capital could encourage more consolidation and partnerships between hospitals in 2008. Stand-alone hospitals might partner or allow themselves to be acquired by larger systems in order to gain access to the financial market, while larger systems might see a benefit from expanding into new markets.
“As access to the capital market tightens, we think hospitals on both ends of the ratings spectrum will begin to look at partnerships,” said Fitch analyst Anthony A. Houston.
Taking on all this debt, however, could end up threatening the credits, Moody’s analysts warned. “The required capital spending often creates short-term credit risks,” Moody’s analyst Lisa Goldstein wrote in the outlook report. Of the 41 hospitals the agency downgraded in 2007, 11 of those were due specifically to increases in debt.
While a national recession would put at least some pressure on revenues — particularly as states facing their own revenue declines move to tighten Medicaid reimbursements — Fitch analysts said they expect this year’s rating changes to be more a factor of local than national issues.
Last year Fitch upgraded 19 hospitals and downgraded six. This year the rating agency expects the number of upgrades to be about equal with the number of downgrades, Schaub said.