A report to be released this week by the Healthcare Financial Management Association says many hospitals may not have access to the capital they need to renovate and expand their facilities in the face of growing demand.
The report, based on research conducted by the HFMA and PricewaterhouseCoopers and sponsored by GE Healthcare Financial Services, shows the number of hospitals defined as having broad access to capital has dropped since 1997, while the number with limited access to capital has risen. The report was provided in advance exclusively to Modern Healthcare.
From 1997 to 2001, the percentage of hospitals defined as having broad access to capital declined to 36% from 42%, while the percentage of limited-capital-access hospitals nearly doubled to 19% from 11%, indicating a widening gap between hospitals in strong and weak financial health, the report said.
The report, How Are Hospitals Financing the Future? Access to Capital in Health Care Today, is the first in a series of six reports on capital access to be released during the next 11 months by the HFMA, which represents chief financial officers and other financial professionals at hospitals.
Reports by trade groups such as the American Hospital Association and various state hospital associations also have documented deterioration in hospital finances. HFMA President and Chief Executive Officer Richard Clarke said the HFMA took a "broader" approach that attempts to define the reasons for access problems and determine steps hospitals can take to increase capital supply, such as improving operations and tapping alternative capital sources.
Future reports will focus on factors that influence hospitals' capital needs, projections of capital demand and supply, and implications for providers and policymakers.
"We're hearing a lot of discussion in talking with CFOs and CEOs across the country about increasing capital demands," Clarke said. "We wanted to define what those issues were (and) identify tools to help them deal with those issues."
The report found links among financial health and geography, as well as bed count, ownership and teaching status. It said states and localities-such as the District of Columbia, Hawaii and New York-with high concentrations of limited-capital-access hospitals also depend on healthcare to support their economy. The report suggests that state-specific issues such as certificate-of-need laws, Medicaid reimbursements, rate setting and laws regarding for-profit ownership of hospitals are responsible for the differences. The HFMA said growth of the healthcare industry may be slowed in these regions, significantly affecting the local economies.
Operational characteristics also vary between financially strong and weak hospitals, with utilization playing a key role in determining an institution's financial success, the report said. From 1997 to 2001, broad-capital-access hospitals reported a 23% higher average daily census than limited-capital-access hospitals, which suffered a 12% decline in patient census. Average operating margins declined to -7.3% from -1.5% for the limited-capital-access group and to 4.7% from 5.2% for the broad-capital-access group.
Sources of capital have changed as traditional lenders have tightened credit. The total amount of capital accessed from traditional sources such as tax-exempt and taxable bonds, equity, bank loans, philanthropy and equipment leases dropped 29% from 2001 to 2002, to $36.5 billion from $51.4 billion, the report says. The proportion of bank loans fell to 7% from 36% from 1997 to 2001 and the proportion of leasing increased to 16% from 7%.
Tax-exempt bonds, the most common form of hospitals' external capital, declined to $19.8 billion from $21.2 billion from 1997 to 2001, although it grew as a proportion of traditional capital sources to 54% from 39% during the same period.
The use of alternatives such as commercial finance and insurance companies, real estate investment trusts and asset sales has increased but is more difficult to measure, the report said. It also found that even hospitals with poor financial profiles have found access to capital and are becoming more highly leveraged than financially healthy hospitals (See related story, p. 10).