Bad Debt, Credit Crunch will Curb Hospitals Capital Spending

Bad debt expense and the current credit crunch will limit the amount of money hospitals invest in capital improvements over the next couple of years, says a healthcare services analyst.

The cutbacks could affect not only service expansion efforts, but the pace of spending on technology to upgrade hospitals’ revenue management systems. Ann Hynes of Boston-based Leerink Swann & Company, Inc. said the industry will still have access to the capital markets. But financing will be more expensive.

“[Financing capital improvements] is not going to be as viable when you have bad debt being an issue and getting worse,” said Hynes, who covers healthcare industry firms Community Health Systems, Health Management Associates, LifePoint Hospitals, Tenet Healthcare, and Universal Health Services.

Capital spending as a percentage of revenue for both non-profits and for-profit hospitals had been strong for most of the decade, Hynes said. Last year, for-profits spent 8 percent of revenues on capital improvement. But Hynes said she expects for-profits to cut capital spending to 6.4 percent of revenue, in part because rising bad debt expense from unpaid patient bills has hampered the industry’s cash flow.

“[Capital expenditures] could slow down for a couple of years,” she said.

The slowdown comes at the time when general hospitals are competing more with specialty hospitals, physician practices, and outpatient centers for customers. And many are exploring the benefits of upgrading to electronic payment systems ("Electronic Payments Grow Slowly in Healthcare," Oct. 29).

However, most for-profits hospitals are not in the best position to borrow. In addition to grappling with higher bad debt expense, Community Health Systems is paying down debt associated with its purchase of Triad Hospitals in July. HCA took on $11.7 billion in debt when it went private a year earlier. And Health Management Associates recapitalized to give shareholders a one-time cash dividend of $2.4 billion or $10 a share earlier this year.

Of the for-profit hospitals, UHS is the only operator with the balance sheet to expand, Hynes said, and it is. The company, which owns acute care hospitals, behavioral health centers and other health services operations, is building new hospitals in Las Vegas and California.

Leerink Swann & Company is an investment banking firm specializing in healthcare equity research, corporate finance, and asset management services for institutional and high-net-worth clients.