THE PARTY MAY BE OVER, but the good times will continue in healthcare, financial analysts say.
After a 2007 that saw capital funds flow into healthcare, sources believe this year will be relatively calm by comparison.
Even so, healthcare remains largely insulated from the financial turmoil plaguing the rest of the economy. While the whole residential mortgage mess continues to drag Wall Street down, the healthcare industry remains aloft, enjoying a sustained period of stability.
Healthcare’s envious position, along with other favorable factors like demographics, have put hospitals in the driver’s seat when it comes to getting financing for capital equipment, renovations and expansion projects. The results of two recent surveys bear this out:
A survey of 464 hospital executives by the Nashville, Tenn.-based healthcare law firm Waller Lansden Dortch & Davis shows that approximately three-quarters of hospitals anticipate capital investments for the renovation of their facilities.
New York-based Wachovia Capital Markets canvassed 40 hospital finance managers and learned that 71 percent plan to increase capital spending in 2008. Although it marks a slowdown from 2007, it still represents positive growth within the sector.
Compared with last year, investment activity is likely to be lighter in the acute care and long-term care sectors, industry observers predict. And while it’s true that healthcare runs anomalous to the rest of the economy, they point out that the industry isn’t totally impervious to its afflictions and therefore could see a degree of reluctance from lenders.
“Our survey was conducted before the credit crunch hit, but most of the hospitals that had capital projects in the works will most likely follow through with them,” said Reggie Hill, head of Waller Lansden’s practice group. “However, those who finance the projects might become more cautious, which could cause delays.”
Bonds and patient debt have crept into the healthcare picture as well, Hill said.
“Many mortgages were packaged to include insurance on bonds, which has had a negative impact on bond insurers,” he said. “This may affect hospitals that need insurance to bring down their interest rate. They could forego the insurance, but their interest rate will be higher.”
Hill also reasons that the financial difficulties experienced by patients caught in the mortgage web could make their way into the hospital accounting department.
“One can assume that if someone is not able to make their mortgage payment, they also cannot afford their health insurance co-payments,” he said. “This impacts hospitals on bad debt, which is already one of their biggest problems.”
Despite its vulnerabilities, investors like Chicago-based GE Financial remain bullish on the healthcare sector.
“Long-term fundamentals are strong and an aging population will continue to drive services,” said Randy Waring, GE Financial’s hospital segment leader. “Financials are at a peak – as strong as they’ve ever been. Liquidity, while it has partially dried up, is still there.”
Investment conditions only appear weak when compared with the first half of last year, Waring said.
“You had very attractive pricing terms, a plentiful amount of tax-exempt money and a very narrow credit spread,” he said. “Now the cost of capital is a bit higher, bond insurers have challenges and the credit gap has widened considerably. But there will still be money available in 2008 to finance investments and interest rates remain at a pretty good point.”