4 Trends in Hospital Financing: Discussion With Claudia Gourdon of Healthcare Finance Group

Financing and access to capital are critical to hospitals' operations, as financing helps hospitals fund projects and provide liquidity to maintain and improve patient care.

However, the economic downtown of the past year has changed how much capital hospitals have access to, and what kinds of projects hospitals can realistically finance.

In this article, Claudia Gourdon, senior vice president of New York-based Healthcare Finance Group, discusses four trends in hospital financing.

1. A bifurcated market
According to Ms. Gourdon, the current credit market has exacerbated the differences between investment grade rated hospitals and non–investment grade rated hospitals.

The investment grade hospitals are generally larger and have a more diverse population base than non-rated hospitals, and, according to Ms. Gourdon, they are the ones with better access to capital in the current market. "They have more resources than the non-investment grade hospitals," she says, "both banks and the public market are more willing to provide financing."

While there has been a general increase in financing costs, the non–investment grade hospitals have seen a relatively higher increase in their rates, as more banks and lenders have become more conservative when considering providing loans, according to Ms. Gourdon.

2. More hospitals looking for working capital, fewer real-estate loans
Ms. Gourdon's company provides asset based revolving lines of credits to the healthcare companies that come to HFG looking for financing.

"Non–investment grade hospitals in particular are looking for assistance with working capital," Ms. Gourdon says. "They are looking for a way to pay for maintenance on their facilities, to cover payroll and to purchase equipment."

Ms. Gourdon notes that, in general, new construction, renovations and equipment purchases have been the biggest drivers of financing in the hospitals market. But, as a result of the credit crunch, Ms. Gourdon notes that "virtually no" real estate loans are being pursued.

Additionally, she sees little cash flow lending. "Typically, cash flow loans are based off of a hospital's historical and projected earnings. In this environment, there is increased stress on the facilities, and it is hard for lenders to see [or predict] robust net earnings. Therefore, they have been more unwilling to lend on that basis," Ms. Gourdon says.

3. Consolidations and acquisitions can provide opportunities for hospitals
A nascent, and probably increasing, trend in the current hospital market has been acquisitions, joint ventures and consolidations, according to Ms. Gourdon. As a result, many hospitals have been looking to fund these kinds of arrangements.

"Hospitals are coming together," Ms. Gourdon says. "The weaker hospitals are being acquired by the stronger facilities. We have also seen a reallocation of services being provided."  Joint ventures with physician groups and/or sales to hospital groups are also increasing in the current market.

For example, HFG recently helped to facilitate the sale of the Anaheim (Calif.) Memorial Medical Center by Memorial Health System to AHMC Healthcare, which operates seven hospitals. HFG provided a $17.5 million accounts receivable backed revolving line of credit to AHMC.

4. Healthcare reform will determine the future of financing for hospitals
In Dec. 2008/Jan. 2009, there was very little activity in the market because the credit markets were frozen, according to Ms. Gourdon. Although the markets have opened somewhat, the outlook for the future of hospital financing is uncertain because of the unknown outcome of the healthcare reform bills in Congress.

"Overall, we know that the monies available to healthcare will be increasing," Ms. Gourdon says. "However, there are a variety of bills that could have many different outcomes for different healthcare provider segments."

Ms. Gourdon says that subsidies are likely to be made available for primary care physicians, healthcare information technology and healthcare facilities in rural settings. Medical education, such as nursing programs, may also see greater government support.

Other sectors of the healthcare market, such as physician-owned specialty hospitals, home health and skilled nursing homes, may face increasing scrutiny under new legislation, according to Ms. Gourdon.

"There is evidence of some of these trends," she says. "It is clear that more money will go toward healthcare over the long haul. I also expect to see more money put into existing programs."

What to look for when looking for financing
Although the market is uncertain, financing is still available. Ms. Gourdon says that hospitals looking for capital should examine their potential lender before going forward with a loan.

It is also important for hospitals to consider the length of time required to close a financing and the process that may be required.

For example, companies looking to finance through HFG undergo a 5-7 week process. After a term sheet is agreed upon and signed, an audit is undertaken by officials from HFG who gather information on the accounts receivable, IT systems and cash receipts. At the same time, a credit analysis of the company is conducted.

Ms. Gourdon says once the due diligence and underwriting phase is complete, HFG may begin the documentation phase and finally close the loan.

"In general, a healthcare provider should look for companies who have maintained a consistent presence in your particular industry segment over a period of time," Ms. Gourdon says. "Some lenders with a presence in many different industries tend to go in and out of a particular industry or industry segment, and that lack of dedication can hurt a provider when times are difficult."

Ms. Gourdon also notes that hospitals should make sure that the company they choose to work with is solid from a financial point of view.

"You want to make sure that your lender is strong and committed to your industry and understands what you need," she says." You want them to be experienced and knowledgeable about your industry, especially if you need them to fund working capital."

For more information about HFG, please contact Claudia Gourdon at (203) 869-6768 or cgourdon@hfgusa.com. You can also learn more at www.hfgusa.com.