Finding Capital

As a result, Andrew Garvey, head of the capital markets group at Cain Brothers, says boards are open to other strategies. With capital being more expensive, boards are focusing on ways to be leaner and stick to the core competencies of running a hospital, says Garvey. They are becoming more interested in other cash sources, such as monetizing assets like their lab businesses or real estate, he says.

Cain points to a hospital in the upper northwest he is working with that is looking at such alternatives. "They have a billion dollars worth of capital needs identified over the next three to five years and they know they can't borrow all of that and they can't cash flow all of that. So they are saying, what are our alternatives? Can we monetize assets and still be able to provide the services to our physicians and our patients that are necessary without having to invest the capital ourselves?" One idea on the table is to partner with a lab company that can come in and run the lab services to preserve capital for other projects, he adds.

Both Garvey and Cain say even the stronger hospitals are going to be careful about where they allocate capital and where they borrow. "It has been a real wake-up call for even the strongest hospitals," says Garvey. They thought that the capital markets were always going to be there in all forms whether it was auction bonds or variable rate bonds. "There was always the availability to get your next bond issue sold. But even the strongest hospitals know that is a riskier proposition going forward," says Garvey.

The outlook is even grimmer for weaker-rated hospitals. "The stronger will get stronger and the weaker will get more challenged in this environment," says Garvey.

"If you are one of the weaker ones you need to be thinking about survival and if the stronger get stronger in your marketplace, you are just going to be in a war of attrition and will have to figure out a strategic solution, which could be a merger."

Cain says hospitals are also seeking to better understand all financial structures so that they don't get caught up in the risky debt vehicles of the past few years. "They have realized that they didn't fully understand all of the moving parts on some of these transactions. So as they go forward they are going to make sure they are fully vetting everything."

Increased scrutiny
At Baton Rouge General, Viator says the hospital is carefully analyzing all of its moves.

"We are in an environment where preservation of cash is more important than ever. So as a part of that we have significantly reduced our capital spending within the organization and increased our level of scrutiny for capital spending." Viator says that even while the hospital is in a market that is relatively stable as far as employment goes, leaders are being careful not to make any financial missteps.

"We are not looking to enter into a lot of debt over the next nine months, at least until we see what comes out of the healthcare reform," Viator says. "Investments that may look worthwhile today, six months from now may not be your best option for your resources."

—Michelle Ponte