NEW YORK – The credit crunch appears to be affecting hospitals’ ability to raise capital and finance capital expenditures, especially for big-ticket items.
A research report issued in April by Wachovia Capital Markets said hospitals are having problems in raising financing that will cause delays with some capital purchases.
However, the long-term trend for capital expenditures appears positive, although large capital expenditures may not recover until the end of this year.
Wachovia analysts warn that more hospitals with lower credit ratings are financing their purchases on increased levels of debt, and borrowing and capital expenditures show increased evidence of a widening gap between “have” and “have-not” hospitals.
Hospitals had problems earlier in the year with financing when the auction rate security market collapsed, said Michael Matson, senior analyst in medical device equity research for Wachovia. Because sellers were reluctant to bid on short-term securities, healthcare organizations that used auctions to sell short-term debt were forced to pay high interest rates on the debt until they could refinance.
“Hospitals have been able to refinance out of those instruments, but it’s taken them some time and diverted management’s attention,” he said.
The Wachovia analysis found that large capital expenditures, particularly those with price tags in excess of $1 million, are most likely to be delayed. Those projects most likely involve some construction associated with the purchase, projects that don’t drive hospital revenue or information technology purchases.
“One-off hospital projects are at risk of delay until they can be combined with other hospital construction projects in an effort to minimize redundant costs,” Matson said. “A purchase that has no tie to revenue or does not expand revenue (is) more susceptible to delay or deferral. Information technology systems are explicitly at risk, particularly those with minimal cost-savings potential.”
High-ticket capital expenditures also require long decision cycles, and that will further disrupt hospital purchasing, as hospital executives may decide to review previous capital decisions or they may be limited because of financing constraints.
Access to capital is becoming more difficult for poor-performing hospitals, Matson added.