Capital Spending Strategies in an Economic Recovery

This article appears in the February 2012 issue of HealthLeaders magazine.

The weak economy has limited the ability of many healthcare organizations to pursue capital projects; indeed, in our March 2011 Intelligence Report, only 29% of respondents said their capital projects were unaffected by delays or elimination, and fully 42% anticipated difficulty accessing capital. While capital spending is expected to increase in the coming year, what short-term and long-term effects does this sluggish economy have on fulfilling strategic goals, and what factors are influencing where you will focus your capital spending?

Gregory Pagliuzza
CFO, Trinity Regional Health System, Rock Island, IL

Our local balance sheet and income statements are not the prime performers within Iowa Health System [with which Trinity is affiliated]. We get an allocation based on our financial performance and operational needs, requiring us on the capital side to step it up as far as operations go.  I know we are not unique in this, but for us it is a little bit more highlighted because we have some older facilities and we need an upgrade. We also have some other functional issues capitalwise that are causing lots of challenges.

Our oldest facility needs significant upgrades. I think it was opened in 1971, so it is 40 years old and there has not been a significant outlay to modernize it. We know what we would like to do, which is to expand and redo our emergency room and set up a cardiovascular center. We also have a significant investment in behavioral health.

The reality is we are going to have to scale it back. We are in the middle of the process to try to justify it, to at least get the cardiovascular and emergency room overhaul done. That has a $70 million-plus price tag. We can borrow. We are AA rated so we are in an excellent position to go out to the capital market. Access to capital is dependent upon our financial performance. If we don't perform, we may not be able to go out and expand as we would like.

Mark Bogen
Vice President of Finance, South Nassau Communities Hospital, Oceanside, NY

Between the equipment technology and bricks and mortar, we've invested close to $300 million in the past dozen years. A master facility plan was launched in the 1990s, culminating with the 170,000-square-foot bed tower in 2006. That success led us to continue an enhanced plan to take us into the next 20, 25 years. In 2008 we got the board to sign off on the plan right as the stock market tanked. We put it on the shelf. We resurrected it again about a year ago, and we are continuing to look at it.

We have been chasing the mythical 435-bed operating capacity as part of the overall master facility plan. But given the length-of-stay decline that we have continued to enjoy over the past four or five years and the softening of the economy and some of the elective surgeries that people are postponing, we are really now looking again at the master facility plan. We don't want to build something that is not going to be supported in the years to come under healthcare reform. With that said, the expectation is we plan to do this master facility plan, which will probably have a price tag of $200 million.

It's not so much currently the access to capital, because we have a strong balance sheet and we have had good performance these past three or four years. But even though interest rates are low, that doesn't always translate into the real cost of capital and whether you can create and demonstrate financial feasibility to ultimately borrow the money.

Gary Boyd
CEO, Mammoth Hospital, Mammoth Lakes, CA

We are a 17-bed critical-access hospital, and the 10-year facility plan is a $50 million expansion of the inpatient area and creating some new clinic space. We are rated BBB-plus, and we would like to be rated AA-minus. We need a couple more years of financial performance behind us before Standard & Poor's will raise our ratings. The healthcare climate, healthcare reform, all those things are going to make that challenging.

We put about 10% on the bottom line and our goal every year is between 7%–10% of margin. If we do that, we will have access to capital. We have done a real financial turnaround here in the past three years. At one point we were down to about 35 days of cash on hand. We couldn't even get a line of credit from the local banks. Today we have about 140 days cash on hand and the banks are coming to us.

Our goal is to have 180 days cash on hand, and everything over that will go toward the building project. As long as we maintain that strong financial position, we will have access to capital—not like the big guys, but we will have what we need.

Jim Shannon
Executive Vice President of Development, LHP Hospital Group, Plano, TX

The impact of reform: Two things drive the discussions that I am having around capital. The first is healthcare reform. Hospitals that were fiercely independent for decades are no longer feeling comfortable being independent. Everybody is sensing that scale is going to be necessary to compete successfully going forward.

The impact of markets: The second issue is there has been a lot of deferred capital over the past few years, and it is starting to be unsustainable in some markets. Given the weakness in the tax-exempt bond financing arena, folks are finding it more and more difficult to access reasonably priced capital. So they are looking for alternatives.

The calls I get are generally from hospitals that have some big capital need that they can't meet on their own. I don't think there is any doubt that the sluggish economy has impacted the credit markets, which in turn have impacted the amount of capital that hospitals have available to them to spend.

The widening gap: What you see in the healthcare industry is similar to what you see in the economy as a whole. There are haves and have-nots, and the gap is widening. The volume of tax-exempt financing has picked up pretty substantially over the past year and a half or so. But the systems that are getting those bonds tend to be the top-tier organizations. If you are not one of those top-tier organizations with investment-grade credit ratings, it is really difficult to access tax-exempt financing
right now.

This article appears in the February 2012 issue of HealthLeaders magazine.