Posts Tagged ‘new technologies’

In Recessionary Times, Private Capital Drives Healthcare Development

Monday, April 6th, 2009

The recession has put the health care industry’s importance to our economy in sharp relief. It accounted for 17 percent of GDP and added 371,600 jobs last year.  Even when the economy lost 651,000 jobs during February, healthcare added 27,000 new positions.pj-am329_pjnurs_200805061826111

In terms of the construction of new facilities during 2009, healthcare development is expected to fall by five or eight percent.  Yet, the drivers that historically have made the healthcare market so strong – obsolescence, new technologies and demographics – are still very much in place.

The collapse of the $330 billion auction rate securities market which let healthcare systems borrow money long term while paying short-term interest rates – cut off a principal source of capital for new development.  Hospitals have investment portfolios tied to Wall Street, another source of capital that is being cut off.  Endowments are drying up as even the most dependable philanthropists see their fortunes shrink.  Access to long-term debt vehicles, such as variable-rate demand bonds backed by letters of credit, is available only to healthcare systems that are A-rated or even better.  Even when a provider has superior credit, interest rates to borrow money may be as high as six to 6.5 percent.  For some hospitals and healthcare providers, the cost of credit – if they can get it – is too expensive.

To fill the gap, healthcare providers are considering private sources that have the capital necessary to finance projects.  The upside of private capital is that it can be committed over the long term to help hospitals and providers fulfill their strategic expansion plans without the same balance sheet implications – something hospitals are focused on in order to maintain a good standing with the ratings agencies.

In a 0 percent federal rate environment when 30-year fixed-rate mortgages have come down to 5.29 percent, capital is competitive with traditional hospital financing, compared with other cycles.