Walk into the boardroom during a budget meeting at any hospital or imaging center today and it's not hard to learn what's keeping directors, managers, and administrators up at night: economic recession. Access to capital. Financing for existing and new technology. Cutting costs.
Those fears are translating into purchasing paralysis as healthcare facilities hoard their cash in a mirror image of the U.S. consumer sector. In fact, recent studies by the American Hospital Association (AHA) found that more than half of hospitals either are postponing or rethinking hospital improvement and capital acquisition projects.
Healthcare's economic meltdown is particularly bad in medical imaging, which was already suffering from two years of lower reimbursement due to the Deficit Reduction Act of 2005 when the crisis hit.
So how are imaging vendors dealing with current economic conditions? In this two-part series, AuntMinnie.com tapped several manufacturers and industry observers for their insights about financial strategies and capital equipment acquisition outlook amid a severe economic downturn, and with healthcare reform squarely on Washington's mind.
Although these observers avoided doom-and-gloom forecasts, they acknowledged that the industry will feel some short-term pain amid an underlying common denominator of cautious optimism.
"Credit is tighter right now," noted Joe Robinson, senior vice president of imaging systems, North America for Philips Healthcare of Andover, MA. "The customers that we would consider 'tough' are having difficulty getting financing approved. There are more personal guarantees being required today than 18 months ago. As you would expect, entrepreneurs in outpatient settings present the greatest challenge, and many of them have modified their capital investment plans accordingly."
John Sandstrom, Ph.D., senior vice president of healthcare at Siemens Financial Services, cited the AHA and Healthcare Financial Management Association (HFMA) surveys of hospital chief financial officers that revealed approximately two-thirds of respondents suggested that they were delaying or canceling capital projects -- including medical equipment acquisitions -- due to limited access to capital and rising costs of capital. Sandstrom added it is "reasonable to assume" similar behavior in the nonhospital segment.
Unfortunately, what ails the economy today is inextricably linked to the finances and operations of healthcare organizations that "are not immune from the effects of the current recession and credit crisis," according to James Ambrose, president of the equipment finance unit at GE Healthcare Financial Services, and chairman of the Equipment Leasing and Finance Association.
"The recession, and associated increase in unemployment, is putting pressure on providers' operating results due to softening volumes as patients defer elective procedures and increased levels of bad debt and charity care," Ambrose said. "At the same time, many providers have seen a significant decline in the value of their investment portfolios due to the falling stock market. They have seen their days cash on hand cut by as much as 50%, while their needs for cash have increased."
Healthcare facilities are reeling from the capital crunch, too, he acknowledged. "Access to capital is much more limited, and even the strongest health systems are having difficulty obtaining the capital they need," he said. "While the bond market has opened up somewhat over the past couple of months as AA- and A-rated institutions re-enter the market, the cost of capital has increased dramatically."
Actual buying patterns seem to reflect the AHA's and HFMA's study results, according to John Vano, president of Radiology Oncology Systems of San Diego. "We have seen a noticeable impact on capital spending projects in healthcare facilities in recent months," Vano said. "One of our major projects was suspended based on a capital spending freeze at a major hospital network. There has also been much resistance to new products and new technology, or any nonessential purchases across the board.
"In terms of new and used products, the radiation oncology segment was not impacted as significantly by the DRA as the diagnostic imaging segment," Vano continued. "As a result, the current economic crisis and resulting capital spending freezes are kicking us while we are down in the diagnostic imaging business. Fortunately for us, being diversified has helped us during these trying times."
Fighting back
But not everyone is succumbing to economic pressure, indicated Joe Maune, worldwide and regional business manager at Carestream Health of Rochester, NY. "We anticipate that U.S. lenders and borrowers will be fairly conservative in their handling of loans and cash, but it appears there will be reasonable access to capital for qualified organizations," he said.
Still, hospitals will grant funding priority to required renovations, revenue-producing products and services, and anything with guaranteed cost savings, noted Irwin Baker, president at RPM Healthcare Strategies of Glen Head, NY. "There is certainly a need to review all capital expenditures and where possible to stay with existing equipment and repair instead of replacing, through the operating budget, rather than the capital budget," Baker said. "Used equipment is also an option. Creative financing solutions from suppliers are being sought, and leasing, cost-per-procedure, and cost-per-test options are more attractive now with a tight money supply."
Vano agreed. "Common sense indicates that when capital dries up, the focus should shift away from the balance sheet and toward the income statement," he said. "[This involves] allowing facilities to expense their equipment needs versus seek capital appropriations."
Bringing financing in-house
With access to external capital limited, many vendors are setting up their own operations to provide capital, often through partnerships with established financial firms.
Philips Healthcare operates Philips Medical Capital, a joint venture between the company and De Lage Landen, a division of Dutch-owned, AAA-rated Rabobank, according to Robinson. "We have money available to lend and continue to be creative to meet dynamic customer needs," he added. Financing options include capital and operating leases.
Meanwhile, Carestream offers sale, lease, and pay-per-procedure arrangements, Maune indicated. "In the past, most healthcare facilities opted for capital expenditure," he said. "Now we are seeing a greater use of our lease and pay-per-procedure plans, especially by small to mid-size hospitals, imaging centers, multiphysician practices, and other healthcare organizations."
But Sandstrom recognizes that many healthcare providers may find it difficult to access the capital markets. He emphasized that Siemens maintains a "strong balance sheet" to minimize the need to conserve cash.
"We plan on aggressively providing financing to our customers whenever possible," he noted. "As other sources of capital have dried up, equipment leasing is even more important as it helps preserve cash for our customers and enables acquisition of new technologies. Given the disruption in the bond markets, leasing is also economically more attractive today."
In fact, Siemens offers fair-market-value leases, $1 purchase option finance leases, and tax-exempt full-payout leases for equipment financing package options, as well as asset-based lending in the forms of revolving lines of credit and term loans.
Ambrose sees customers pursuing familiar financing alternatives. He cited three specific options many providers favor:
- Tax-exempt private placements for equipment acquisitions and smaller construction/renovation projects
- Leasing for new equipment and sale-leasebacks on existing equipment to generate cash
- Third-party real estate development/ownership for outpatient facilities and monetization of existing properties to generate cash.
"Most of these are not new, but they are old ideas whose time has come again," Ambrose said.
Binding ties?
With capital access in question for healthcare facilities, some argue that availability may be tied to higher lending rates or even to performance measures, including quality and safety initiatives, akin to the U.S. Centers for Medicare and Medicaid Services refusing to reimburse for selected preventable medical errors.
"There has been and will continue to be priorities set for where capital dollars are spent," said Baker of RPM Healthcare Strategies. "Suppliers providing products related to regulatory requirements or those who can guarantee cost savings will be more desirable."
Baker raised the possibility of risk-sharing agreements between suppliers and providers. "Suppliers will have to do more due diligence regarding the cost-effectiveness -- or more importantly, the cost-saving potential -- of their products and services," he said. "Tailoring offerings to the specific needs of the provider will also be required instead of the one-size-fits-all approach currently used by some in the industry."
Interest rates are definitely higher right now, according to Robinson, but there is money available to lend. "Credit is tighter and requirements on the part of customers are greater [than before the DRA and banking meltdown]," he said, "but like financing a house right now, if you have good credit, there is generally not a problem getting money. I have not seen from my side of the business quality and safety initiatives as barriers for funding projects, although I am aware of a lot being written regarding an impact on reimbursement in the future."
Siemens' Sandstrom acknowledged that banks and finance companies are lending less. "When they do lend, they are looking to increase their rate of return to offset the current risks in the market," he said. "This will translate into higher borrowing rates. As the financial markets normalize, access to capital should improve, as should rates."
But GE's Ambrose countered that capital remains available to those "healthcare providers who are well-positioned in their markets and who can demonstrate strong financial discipline."
"Lenders are looking not only at financial performance but also want to see that the organization has made sufficient investments in quality, safety, physician alignment, and market competitiveness," he continued. "In addition, because many institutions have experienced a dramatic decline in liquidity and cash flow, lenders are checking to see that borrowers are in compliance with their financial covenants, such as days cash on hand and debt service coverage, and are not in danger of triggering an acceleration or refinance of existing debt."
Vano of Radiation Oncology Systems defended healthcare's stability among grim economic times, which makes it still relatively attractive to capital investors. Instead, he pointed to "internal capital" as "causing most of the pain as healthcare foundations and investment groups have been clobbered by financial markets."
While Maune of Carestream agreed that the cost of borrowing may increase, he said he does not "foresee the linking of lending with quality or safety measurements in the United States."
Sandstrom concurred. "We have not heard of performance measures being considered as a price or risk factor tied to commercial lending activities," he said. "We've only heard of this in context of reimbursement rates."
By Rick Dana Barlow
AuntMinnie.com contributing writer
March 19, 2009
In part 2 of our series, we will touch upon the prospects for recovery in the imaging market in 2009, as well as how the Obama administration's healthcare reform plans will affect the industry.
Related Reading
Imaging and the economic crisis: Part 2 -- Recovery and reform, March 24, 2009
Report: Hospitals hit by capital crunch, February 2, 2009
Survey forecasts drop in capital purchasing, December 18, 2008
Copyright © 2009 AuntMinnie.com
