It all started with subprime mortgages and a rash of residential foreclosures. But when world-class commercial banks began writing off billions of dollars worth of defaults, the ensuing credit crisis led to tighter lending practices. Unfortunately, hospitals needing to secure loans or issue bonds for major capital projects may feel the pinch.

“Lenders are asking really tough questions,” says Rick Gundling, vice president of the Westchester, Ill.-based Healthcare Financial Management Association. “The funding will come and you'll have the money, but you'll have to jump through more hoops.”

Brian Keely, president and CEO of Coral Gables, Fla.-based Baptist Health System of South Florida — a faith-based healthcare organization with six hospitals from Miami to the Florida Keys — says he was lucky. “We started our bond issue last year to restructure our long-term debt. It was a fortuitous time to do it.” Having a Double-A bond rating also helped, he adds.

Others are hoping to be just as lucky. “We're going to issue new debt in 2008,” says Catherine Jacobson, senior vice president of strategic planning and finance at Rush University Medical Center in Chicago. “We traditionally use bond insurers for our debt, but right now we're more concerned about how we go about structuring the debt and the type of bond to issue.”

Jacobson says that because her institution was not rated until 2006, a number of options were considered. “We've contemplated, in the past, going to a private investment firm,” she says. “But tax-exempt debt is still the most cost-effective.” However, she notes, “Our bonds carry a Triple-A rating, and you pay a premium for that.”

Cautiously optimistic

The feeling among most industry analysts is that in the foreseeable future, hospitals in good standing will not have trouble borrowing money. But for some, the cost of borrowing that money may go up.

Closely watching the credit market, Scott Clay, senior principal at the Noblis Center for Health Innovation in Falls Church, Va., says, “Healthcare is several steps away from the credit crisis.”

Yet he cautions CEOs and CFOs that because of a “flight to quality,” lenders are hesitant about taking on more risk. “For hospitals that have lower credit ratings, it's going to be more expensive to borrow money,” he says.

Part of the additional expense will come from bond insurers, he explains. “When hospitals issue bonds, they get bond insurance. But those bond insurers have also been directly tied to the mortgage crisis. So it will make the market tighter and will make it harder to get bond insurance.”

John Sandstrom, senior vice president and general manager of the Healthcare Finance Unit of Siemens Financial Services Inc. in Iselin, N.J., divides hospitals into the “haves” and “have nots.” The haves, he says, do more capital spending and have easier access to funding. On the other end of the spectrum are the smaller, weaker hospitals that often have to partner with the “haves” to form a healthcare network. As a result, they can benefit from partnering with a larger, more financially sound hospital.

Yet Sandstrom sees the flight to quality beginning to take a toll on borrowing. “The ‘haves,’ those with strong balance sheets, are able to borrow money easier, and they will still be able to use their revenue bonds,” he says. “If they do not have a strong balance sheet, they'll pay higher prices to borrow money.” As for the “have nots,” Sandstrom says, “The availability of tax-exempt bonds is lower.”

But Nick Hilger, a former hospital CEO who is now senior vice president of business development at Eden Prairie, Minn.-based Ingenix, sees very little change in the way lenders are looking at hospital borrowing. “The credit crunch is a non-issue,” he says. “They are still able to borrow if they have a reasonable balance sheet and are not too leveraged. If you've got good earnings, you can borrow.” Even those with less than stellar bond ratings can still find funding, he says. “If they've got a Triple-B rating or lower, they can still borrow. But the basis points will be a lot higher.”

Weighing the options

For those looking for less traditional types of financing, Clay says there are other options. Besides tapping into cash reserves or issuing long-term capital bonds, hospitals can beef up philanthropic efforts in order to coax larger gifts from donors, he says. (See story on page 42a.) For new equipment or upgrades, bank loans or leasing the equipment from vendors may be an option. As a way to cut costs and raise additional short-term capital, Clay says, “They might look at selling non-core assets, like medical office buildings, and then lease them back.”

There also are options for those with low bond ratings. “There's HUD 242 financing, in which HUD insures your bond,” he says. “But the reason this is not used often is that it requires stringent covenants and a lot of work up front.” Hospitals also can secure loans through private investment firms.

Aside from availability, Clay says the biggest problem here is trying to gain the interest of investors who are steadfastly evaluating the risks of their investments. And those investors, he says, want to be sure that projects are sound and that they'll get a return.

Sandstrom also cautions hospitals about using private equity funds, because they're giving away part of their profits. “For-profit hospitals can do that,” he says. “For not-for-profits, it's not a good strategy.”

No one knows yet how long the economy will remain in the doldrums or how severe the credit crisis may become. In light of current market conditions, Clay remains cautious. “My sense is that the ripple effects will be felt throughout 2008,” he says. “I don't feel the full impact has been felt yet.”