No Consensus on Capital Spending

Karen Minich-Pourshadi, for HealthLeaders Magazine , January 8, 2010
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"Hospitals have to continue their projects to remain competitive and replace their aging facilities," says Van Gorder.

Many not-for-profit hospitals need to add square footage, or at a minimum renovate to optimize existing space, to outpace their communities' aging and growing population. On top of that, if the hospitals are unable to produce the capital necessary to build, they may lose market share to newer facilities.

An alternative approach has been embraced by hospitals that couldn't fund new construction, but could devote funds to retrofit what they have. Reed Construction Data for 2009 indicates that there was growth in hospital alterations, which incorporates physical changes to existing space. Alterations at hospitals actually reached a seven-year high, increasing by 6% over the previous year, and over 14% from 2005 when new builds were at their height.

"Many hospitals are adapting and reacting. They are doing smaller projects and using existing space to help them maintain their edge," explains James Brownrigg, vice president and director of healthcare at Turner Construction Company, the nation's largest builder of healthcare facilities.

Financing catch-22
Pursuing construction has become a catch-22. Facilities need to build to stabilize (and grow) their weakened bottom lines. However, since the economic downturn, they need a strong balance sheet to secure the construction capital.

Many not-for-profit hospitals assumed that the capital markets were always going to be there—be it an auction-rate bond or a variable-rate bond. But once the market crashed, facilities were left with the same realization as individual investors: The market is risky and sometimes the risk does not pay off.

"A lot of us had variable-demand bonds," says Van Gorder. "We had to refinance our debt and get into more traditional debt vehicles. In our case, we are rebalancing our debt away from a variable-rate debt into more fixed-rate debt in anticipation of interest rate increases in the future."

Many hospitals are also diligently refinancing out of insured bonds, when possible, and to fill the void left by bond insurers they are obtaining letters of credit from banks. Nevertheless, for so many healthcare facilities the damage to their credit is done.

"In the world of finance, certainty is a very important component to driving down the cost of capital. Uncertainty results in a premium," says Steve Kennedy, vice president and investment banker for the Columbus, OH-based Lancaster Pollard, a financial services firm for healthcare organizations.

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