4 Drivers of Healthcare Capital Financing — And How They Affect CFOs

Capital financing has varying effects on hospitals and health systems, and much of that has to do with the size of the organization.

For example, for-profit hospital chains can go to the debt markets with ease to fund large-scale capital projects because of their size and scope. Franklin, Tenn.-based Community Health Systems and Dallas-based Tenet Healthcare are just two for-profit operators that have routinely issued debt in the past year for various financing initiatives.

Smaller, middle-market, non-profit hospitals may have a harder time with their financing options because they may be less able to absorb all of the associated responsibilities and financing costs.

However, large, for-profit providers and smaller, non-profit organizations have both witnessed several common trends in the past few years for why they need additional financing. Mark Tambussi, senior vice president and national manager of healthcare equipment finance at PNC Equipment Finance, explains the four drivers behind capital planning that are affecting all healthcare providers, big or small.

1. Impact of healthcare reform.
In the current financial environment, healthcare CFOs are asking themselves, "What is the best way to fund capital expenditures right now?"

"Should I use cash? A bond offering? Expand credit facilities with a bank group? Consider equipment financing through leasing?" Mr. Tambussi says. "Realistically, I think it's a 'yes' to all. But that decision also centers on where the health system is in its [financial] cycle."

The reason why CFOs are exploring these many different financing options right now is because healthcare reform, in several different ways, requires them to do so. Transitioning from a fee-for-service environment to a value-based model of care does not magically happen, Mr. Tambussi says. Hospitals and health systems need new capital in order to purchase the right type of healthcare equipment and infrastructure that will transform their organizations from inpatient-centric to accountable care organizations — which are the fundamental tenet of healthcare reform.

"Healthcare reform is about preparing for a new payment method," he says. "Access to capital is going to help [hospitals] achieve those core initiatives."

2. Health IT initiatives. Health information technology is the most common example and the "low-hanging fruit" of new capital initiatives these days for providers, Mr. Tambussi says.  

Hospitals and health systems are implementing electronic health records at a feverish pace in order to modernize their facilities. Such projects can be expensive, and some hospitals are finding innovative ways to finance them. For example, Arkansas Heart Hospital in Little Rock recently agreed to a financing deal with Siemens on health IT and EHR financing. In October, 11 critical access hospitals in California also received capital financing from UnitedHealthcare — a health insurer, no less — to implement EHRs and other health IT measures.

No matter the size of the system or hospital, EHRs and health IT in general are at the forefront of capital planning, Mr. Tambussi says.

3. Strategic position in the market. Mergers and acquisitions have boomed in the hospital market over the past several years. For-profit systems are scooping up struggling hospitals, non-profit organizations are merging with competitors and most hospitals are active in acquiring physician practices to better align their continuum of care.

However, to enter the M&A market, hospitals and health systems must have the right financing. Mergers, acquisition and other affiliations can be very capital-heavy. Some of the largest healthcare transactions of the past six years have required hundreds of millions of dollars.

For example, Nashville, Tenn.-based Vanguard Health Systems bought Detroit Medical Center in 2010 for $1.22 billion. New York City-based private equity firm Cerberus Capital Management acquired Caritas Christi Health Care in Boston (now Steward Health Care System) for $830 million in 2010. Last year, St. Louis-based Ascension Health purchased Alexian Brothers Health System in Arlington Heights, Ill., for $645 million.

Those are, of course, extremes. However, as hospitals attempt to improve their strategic position in their primary service areas and beyond, Mr. Tambussi says they will need the appropriate kind of financing to fund any strategic initiatives as well as all the peripheral costs (e.g., new equipment and other start-up costs).

This trend has continued in 2012, as Livonia, Mich.-based Trinity Health closed on two credit facilities worth $931 million, potentially to help fund its recent affiliation with Newton Square, Pa.-based Catholic Health East. Franklin, Tenn.-based IASIS Healthcare also announced it will use $115.2 million in cash left over from a debt refinancing to fund future acquisitions.

4. Quality control reporting. Healthcare reform has played a big role in hospitals and health systems ramping up their quality control reporting programs. Although quality control reporting is still in its infancy, Mr. Tambussi believes it will become an even bigger financing issue in 2014 and beyond.

"Healthcare reform has an impact on this," Mr. Tambussi says, referring to CMS' Value-Based Purchasing program. "It's small now, but it will get larger as time goes on. Reimbursement will be based on outcomes."

Hospital CFOs who are looking at these drivers of major capital financing projects need to understand one primary concept, Mr. Tambussi explains: Make calculated decisions with full executive support on capital needs and financing because a capital project could make or break an organization in the future.

"A well-designed capital plan, which includes equipment finance, is only going to strengthen your hospital," Mr. Tambussi says. "It's going to help you address the many competitive and financial issues the market is thrusting upon us."

More Articles on Hospital Finance:

Hospital Bond Volumes Down 27% in 1Q of 2012
4 Key Trends in Healthcare Financing for 2012

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