Hospitals, Eager to Build

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http://www.nytimes.com/2004/06/15/business/15hospital.html?ex=1088382402 & ei=1 & en\

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Hospitals, Eager to Build, May Find Funds ScarcerBy REED ABELSON

 

Published: June 15, 2004

 

 

After years without enough money to make capital improvements, hospitals say

they want to go on a spending spree - building surgery centers, renovating

operating rooms, buying the latest medical equipment and even putting in badly

needed new computer systems. The big question is how long this can last.

 

Hospital executives plan to increase their capital spending by an average of 14

percent a year for the next five years, according to a recent survey.

 

" I think what sits out there is a pent-up demand for capital, " said Robert Lux,

chief financial officer of the Temple University Health System.

 

Temple, an inner-city hospital system in Philadelphia, is spending about $75

million on a new ambulatory care center that had been discussed for more than

five years though ground was broken for it only last year. Temple has already

borrowed $50 million and is in talks with lenders about borrowing the rest.

 

But consultants say the industry's planned splurge, no matter how long overdue

and badly needed, could be short-lived.

 

The expected rise in interest rates will make borrowing much more expensive,

because hospitals, typically run as nonprofit organizations, frequently raise

money by issuing tax-exempt bonds. And hospitals that plan to finance the

projects with cash from operations could see future revenue squeezed as private

insurers balk at paying ever-higher prices for care and the federal government

looks for ways to cut the budget.

 

" Hospitals are going to have to prioritize, " said James Callanan, chief

executive of the ImPart Group, a Boston consulting firm that advises hospitals.

" We're not going to be able to do our wish lists. "

 

What hospitals are likely to spend money on, consultants say, are the areas that

return the favor: moneymakers like operating rooms, surgical suites, and medical

and diagnostic equipment. " Everything else will get pushed to the back burner, "

said Mark Wietecha, a health care consultant with Kurt Salmon Associates in

Atlanta.

 

The deferred items are likely to include some of the computer systems and other

information technology that might help finally bring the administration of

health care into the 21st century.

 

Also needed but likely to be delayed are the replacement or renovation of old

facilities - aging hospital wings or decrepit elevators in need of makeovers.

 

" When push comes to shove, what typically happens is infrastructure tends to

suffer to medical technology, " said Richard L. Clarke, president and chief

executive of the Healthcare Financial Management Association, a group of

hospital finance executives based in Westchester, Ill., that is studying

hospitals' capital needs with GE Healthcare Financial Services, a lender and

adviser to the industry.

 

The spending urge comes as hospitals react to a long period of scant buying and

building - a result of lower payments from Medicare that followed the Balanced

Budget Act of 1997. Some systems also used their capital for investments like

physicians' private practices in hope of gaining patients.

 

In recent discussions with hospital administrators, the executives indicated

that they had delayed making critical capital investments as long as they could,

said Randy Fuller, the hospital segment manager for GE Healthcare. Spending, he

said, " has become an absolute imperative. "

 

In fact, hospitals have already started. Construction alone reached $15 billion

last year, roughly 50 percent more than annual construction spending through

much of the 1990's.

 

Last week, St. David's HealthCare Partnership, a system in Austin, Tex.,

announced plans to spend $100 million on capital projects, including a new

intensive-care unit and outpatient surgery center as well as the purchase of a

gamma knife, specialized technology that uses gamma radiation to treat brain

tumors.

 

Hospitals seem to be having no trouble finding money for construction projects,

said Robert Levine, an executive specializing in health care clients for Turner

Construction. Even for-profit hospitals that do not raise money by selling bonds

are picking up the pace, he said. Those hospitals tend to finance the projects

from operating revenue.

 

" There's a lot going forward,'' he said. " But there are some storm clouds. "

 

Continued.....