US Hospitals to Delay Improvements

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Disappearing Credit Forces Hospitals to Delay Improvements

By REED ABELSON

In late August, even before the credit squeeze reached a full state of

crisis, a hospital system in Hawaii filed for bankruptcy

reorganization after a lender failed to extend a loan for another month.

By September, a nonprofit hospital in Philadelphia found it could not

borrow money through a traditional bond offering because the municipal

bond market had come to a virtual halt.

And now, a hospital system in Minnesota says it plans to delay some

new buildings, while another hospital group in Connecticut has decided

to postpone the replacement of an emergency room. Other hospitals

around the country say they are thinking about deferring the purchase

of expensive new equipment like computer systems or

multimillion-dollar M.R.I. machines.

The hospital industry, in other words, is among those struggling with

the credit scarcity that the federal government's latest financial

bailout plan is meant to alleviate. And lending relief, if it comes,

cannot come too soon.

Hospitals " are not immune, " said L. e, chief executive of

the Healthcare Financial Management Association, a professional group

for hospital finance executives. He noted that hospitals, like any

other business, relied on credit for building projects and to maintain

overall liquidity.

Tight credit is adding to a financial challenge that some hospitals

are already facing, as greater numbers of patients are unable to

afford the rising out-of-pocket portions of their medical bills or

lack insurance altogether. Many hospitals say they are already seeing

an increase in their bad debt — money they bill patients for but

cannot collect.

And that problem could get worse, as people worry first about paying

their mortgages and credit card bills before dealing with their

medical bills, said , a hospital analyst at Citi Investment

Research. " We're worrying about collection rates falling, " he said.

Despite the stereotypical notion of health care as recession-proof,

hospitals worry that if the financial crisis leads to a severe

economic downturn, they will feel deep pain. Many are already cutting

budgets.

And that hunkering down by hospitals could have a ripple effect on

suppliers of medical equipment like General Electric and Siemens, not

to mention the construction industry, analysts say. The labor market

could take a hit, too. As major employers, hospitals had been among

the bright spots in the country's job statistics, but their hiring is

also starting to slow.

For hospitals, the current financial environment stands in stark

contrast to the recent past. After years of heavy capital spending on

new and improved equipment and buildings, outlays that were driven by

easy access to credit from banks and bond markets, many hospitals have

scaled back their ambitions as they scramble to protect their cash

positions.

" Suddenly, the rug is getting yanked out from under them, " said

Smyth, a consultant at Kurt Salmon Associates, which advises

hospitals.

Even hospitals that traditionally have been among the best capitalized

and financially robust say they are rethinking their priorities and

looking for ways to cut expenses.

" We need to focus on tightening our belt, " said Glass, the

chief financial officer for the Cleveland Clinic, the Ohio system that

includes some community hospitals as well as its flagship medical

center. The economy is particularly tough in northeast Ohio, where Mr.

Glass says unemployment is now hovering around 7.5 percent.

Tight credit has left some hospitals with few options. Although some

recent bankruptcies have involved hospitals that were struggling

before the current credit crisis, Hawaii Medical Center said it was

forced to file for Chapter 11 simply because it could not find the

short-term credit it needed to keep paying its bills.

" Our suspicion is that we are caught up in this market, " said Salim

Hasham, an executive with Hawaii Medical.

This year, the Hawaii center bought two hospitals and lined up a $12

million revolving line of credit from Siemens Financial Services,

which it said was secured by accounts receivables — the money owed to

the medical center from insurers and patients. Hawaii said it had been

meeting the monthly interest payments of $40,000 or so on the loan,

but in August, Siemens was unwilling to extend the credit any further.

The center had no choice other than to file for bankruptcy, Mr. Hasham

said. " It gives us breathing room to get what we need done. "

Siemens said that it could not comment on its dealings with the Hawaii

center, but that it " remains committed to being a stable financial

partner in these unstable times. "

In Philadelphia, the Albert Einstein Healthcare Network considers

itself lucky, according to its chief financial officer, K.

Derrick. It was able to get a one-year loan after failing to raise

money in the kind of tax-exempt bond offering that not-for-profit

hospitals frequently use.

The network needed the financing because, as part of the deal to spin

itself off from another hospital system, Einstein initially had agreed

to repay its share of the system's overall debt. But despite its

strong financials and an attractive interest rate of 6.02 percent,

Einstein could not raise $90 million through a fixed-rate bond

offering it planned in late September.

" It became obvious that week that nothing was selling, " Mr. Derrick said.

Because Einstein had already looked into alternate sources of

financing, it was able to secure a one-year bank line of credit for

$130 million on Sept. 30. The lead banker, as it happened, was

Wachovia, whose own problems have since forced it to sell itself to

Wells Fargo. Wachovia was able to line up a second bank to help on the

deal, and the credit line has not been threatened, according to Mr.

Derrick.

" The real challenge is we're in a somewhat short-term situation here, "

said Mr. Derrick, who said Einstein now had a year in which to find

permanent financing.

Elsewhere, while the construction sites that have become familiar on

so many hospital campuses remain active, many hospital executives and

consultants say the building boom is likely to subside. " What you're

going to see is a big slowdown in capital expenditures, " said Russ

Rudish, a health care consultant for Deloitte.

While many hospitals say they have no plans to abandon projects

already under way, they are already deferring new ones.

In Minneapolis, for example, construction continues on a new 90-bed

hospital, Maple Grove, that began in June 2007. " That's fully funded, "

said M. Fox, the chief financial officer for Fairview Health

Services, which is one of two hospitals that teamed on the $144

million project and jointly financed it through a tax-exempt bond

offering, guaranteed by the two health systems. But Fairview has

postponed two other building projects.

Hospitals are " trying to minimize the excess bricks and mortar, " Mr.

Fox said. Fairview is also taking a close look at its operations, he

said, to see if there are ways to increase cash flow by speeding up

collections or reducing less profitable operations.

Hospitals also face the prospect of steep cuts in payments from the

federal Medicare and state Medicaid programs. Connecticut, for

example, recently projected a $300 million shortfall in the entire

state budget, which is likely to impinge on its Medicaid program. " We

see a number of clouds on the horizon, " said G. Kiely, the

chief executive of Middlesex Hospital in Connecticut. " This is a time

to be prudent. " Middlesex has chosen to delay a new emergency room at

one of his hospitals for at least a year and half.

Rush University Medical Center in Chicago just broke ground on a new

14-floor building, expected to cost about of $550 million. Rush plans

to pay for it through a variety of sources, including $220 million of

a $350 million bond offering the hospital system still hopes to

initiate before the end of the year. Rush officials say that while

they are committed to completing that project, others are much less

certain. Higher interest on its existing debt is already costing the

system more than $2 million more a year than before, said A.

son, the chief financial officer for Rush, and the hospital is

also taking a hit in its investment portfolio.

http://www.nytimes.com/2008/10/15/business/15hospital.html