Thursday, December 18, 2008

New health-care acronym spells cash trouble

Health care has always been a world full of confusing acronyms — CMS, DRG, MD, RN, HIPAA and others.

Unless you make sense of the never-ending parade of consonants and vowels, you'll never be perceived as a credible industry insider. Now, health care has a new and primary acronym to master. It is DCOH.

DCOH stands for Days Cash on Hand. The business mantra of the moment is "plan for the worst," and today that means companies must conserve their cash as much as possible.

HCA's recent use of the PIK (payment in kind) option to make a bond payment with a promissory note is evidence of this primacy.

The two principal credit rating agencies for the U.S. not-for-profit hospital sector are Fitch Ratings and Moody's Investor Services. This month, both have downgraded their view of the hospital sector, reporting a material weakening in several areas affecting hospital creditworthiness.

The Moody's report was particularly enlightening. In the third quarter this year, Moody's reported 10 upgrades and seven downgrades; the first two months of the fourth quarter (Octo ber/November) showed 18 hospital downgrades and one upgrade.

It has been more than a decade since Moody's has seen such a sharp spike in downgrades. Elements in the down ratings include investment portfolio losses, more uncompensated care and under-funded pension plans — another victim of the equity market slump.

However, a primary rationale for the negative views is the rapid demise of days of cash on hand. For many hospital systems, cash is down 20 percent to 30 percent from 2007.

Not-for-profit hospitals are the principal victims of the credit crunch because credit is their primary source of capital. Many nonprofit systems have initiated strategies to deal with the financial stress, including layoffs, outsourcing and capital spending delays.

For example, this month Cath olic Health Initiative in Denver announced the suspension of a replacement hospital project in Kentucky.

Stress leads to acquisitions

A key factor in the growth of Nashville's for-profit hospital industry was the ability to access both equity and debt capital. Nonprofit health systems could access only debt capital. As credit ratings decline, Nashville hospital companies should expect a robust market in potential acquisitions.

Less than two weeks before Christmas, it's clear that 2008 has been a dreadful year for health- care mergers and acquisitions. Although the first quarter of 2009 will certainly be one of the most unpleasant in our professional careers, the backside of these events may prove to be significant opportunities for Nashville companies to acquire prime hospital assets at good prices.

Let's hope it comes sooner rather than later.

HCA to conserve cash, pay debt with bonds
No Place Like Home For Savings