Fitch Ratings reports that the U.S. for-profit hospital industry posted strong numbers in the second quarter of 2009 in its most recent quarterly analysis. Volumes and free cash flow were at the highest levels recorded in several years. Like most other industries, hospitals have benefited mainly from cost management efforts and reduced capital spending.
Capital expenditures as a percentage of revenues decreased below 5 percent for the second quarter of 2009. The historical average is between 5 and 7 percent. Again, like other industries, hospitals are hoarding cash. Some analysts have speculated that companies are concerned about another credit crunch and do not want to be caught without significant cash reserves. This may be true, but on the positive side, if the confidence that has returned to the banking and commercial paper system translates into sustained lending and access to short-term funds, the excess cash held by hospitals would put them in a position to deploy the cash for investment opportunities, including acquisitions.
Fitch Ratings has identified several key areas of potential health care reform that may have positive or negative implications for the hospital industry. Congress is expected to turn its attention to health care reform shortly as it returns from the August recess. However, with the debate raging, it is anyone’s guess as to what the final legislation will contain. The following are the areas that Fitch Ratings is following:
- Coverage: Increased coverage of the uninsured wold be positive for the sector as a result of decreased bad debt expense and increased utilization;
- Reimbursement: If coverage expansion is not sufficient to offset reimbursement declines or if reimbursement declines occur well before expansion is realized, this cold negatively impact profitability;
- Changing Industry Dynamics: Certain aspects of health care reform may reduce competition in the hospital industry; these include a ban on self-referrals to physician-owned hospitals (with limited exceptions) and the fact that reimbursement pressures would have a more negative effect on non-profit institutions, which typically have lower operating margins;
- Increased Mergers and Acquisitions: Hospitals with substantial scale and that are able to profitably treat both private and governmental patients will withstand the transition most successfully. Thus, acquisitions may increase as a result of health-care reform.
The full Fitch Ratings report (registration and/or subscription may be required) is available here: Fitch’s For-Profit Hospital Industry Quarterly Diagnosis.
Gregg D. Killoren
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