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Financing for HIT Projects Increasing

October 5, 2010
by Mark Hagland
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Interview: Randy Waring, Managing Director, GE Capital Financial Healthcare Services

While the outlook for the U.S. economy in general, and the hospital and healthcare economy in particular, continues to appear mixed these days, some industry experts are seeing a definite, if gradual, shift towards increased confidence among many hospital senior executives, when it comes to reaching out for the capital to make new and expanded investments, particularly in information technology. One expert who is seeing this in concrete terms is Randy Waring, who is managing director at the Brookfield, Wis.-based GE Capital Financial Healthcare Services. Waring is seeing a definite pickup in requests for financing around IT projects these days, especially given the meaningful use requirements under the federal American Reinvestment and Recovery Act/Health Information Technology for Economic and Clinical Health (ARRA-HITECH) Act. He also cites the recent “Oppenheimer 2010 Hospital CEO/CFO Survey” (released last month), which found that while “the average capital expenditure budget for respondents in our survey this year has been flat with fiscal 2009’s… Looking forward, the hospital managements in our survey are expecting a slight improvement in fiscal 2011.” That survey found that 54 percent of survey respondents expected growth in their budgets in fiscal year 2011, versus 46 percent who saw flat or reduced budgets in 2011. Waring’s organization currently works with 2,000 hospitals nationwide, across a spectrum of financing mechanisms, including leasing, tax-exempt financing, and others.

Waring spoke recently with HCI Editor-in-Chief Mark Hagland regarding the developments he is seeing in hospital capital financing, particularly with regard to healthcare IT investments.

Healthcare Informatics: Have you seen a shift recently in hospital and health system capital financing patterns?

Randy Waring: Yes. We’ll finance pretty much any hospital financial need a hospital has; but we’re seeing greater investment in IT now. Probably half of what we do is to finance imaging equipment; but the rest is financing IT, as well as bricks-and-mortar projects.

HCI: So perhaps a third of your activity involves financing IT now?

Waring: I don’t know, but it’s definitely a significant component.

HCI: What are the biggest trends you’re seeing, overall, right now?

Waring: We’re definitely seeing an increase in interest in financing of IT projects; and the investments we’re seeing run all the way from a $2 million departmental IT project, to $100 EMR implementations. The main method we’re seeing now is private-placement tax-exempt financing, which involves tax-exempt bonds, where the investor doesn’t have to pay any federal tax on the interest income they receive. And what makes the private-placement option advantageous is that you don’t have to go through the extra time, hassle, and expense involved in a public finance offering.

We’re seeing an increase in that type of financing now for a couple of reasons. One is that the public bond market has been tougher to access in the last few years, and the covenants and provisions involved are tougher than they used to be. And there’s also a new alternative that came in through the federal ARRA. And as part of ARRA, they provided a special stimulus for tax-exempt entities to be able to borrow from banks. It’s an expansion of what was called the bank-qualified rule; a longstanding provision in the tax code to allow banks to invest in tax-exempt municipal bonds, in small quantities. But they liberalized the rule and made it so that qualified hospitals can access bank-qualified financing for projects up to $30 million. And that helps a lot. Most of the IT projects that we’re seeing are under that, though there are some very large ones. But most of what we see comes under that ceiling, and would be eligible. Now, the rule was set to expire at the end of this year, 2010; it’s been hung up in Congress now. There are a lot of people lobbying for its extension, but we don’t know if it will be extended or not. Right now, that window of opportunity is set to close on December 31.

HCI: So you’re seeing a lot of hospitals use that type of financing for basic EMR implementations?

Waring: Yes. We have financed a couple ourselves. And we’re seeing a lot of interest in IT, because these IT projects have a lot of software and implementation costs involved in them, and it’s hard to lease an IT project, given all the soft costs. So you’re really looking at bond financing or loan financing, and this really is the ideal option.

HCI: Are you seeing primarily smaller and mid-sized community hospitals doing this?

Waring: Well, we’ve got one multi-hospital system in the Midwest that did a $10 million project with us. I’m not sure exactly the scope of that particular project.

HCI: Are you seeing a burst of demand because of HITECH and the meaningful use requirements?

Waring: I believe that that is spurring a lot of this. In the conversations I’ve had with a lot of CFOs, they’ve run the numbers; and they know what the reimbursement schedule will be under HITECH for four or five years. So they can figure out what the reimbursement result will be. What we’ve done in some cases is that we’ve structured our financing so that the payment schedule coincides with the federal government’s reimbursement plans. We’ve structured that one project so that for the first couple of years, they won’t pay us back anything, until they’ve demonstrated meaningful use. Now, the cash flows they’re laying out won’t cover the full cost, but will cover a pretty substantial portion of it.

HCI: Do you see some hospitals working through the logic on incentives and penalties under HITECH?

Waring: I don’t really talk to CIOs, but I talk to CFOs regularly, and they understand this, that if they don’t get moving on this now, there will be a stick in the future. And they are aware of the incentives in the future, and are becoming aware of the more liberalized financing rules. So I’m seeing a real surge in activity since the beginning of last year, a lot more IT projects than before.

HCI: What do you see as the biggest trends in the next few years?

Waring: I’ll start at a higher level, and this comes out of a survey that we did a few months ago. CFOs’ biggest concern down the road is reimbursement cuts. One of the ways they’ll fund healthcare reform is through cuts in Medicare reimbursement; plus, a lot of states will make cuts in Medicaid reimbursement. So the health systems I’ve talked to have said they know they’ve got to be more efficient and cost-effective so that they can even make money off Medicare patients. So they’re really focusing on efficiency and making that break-even point. The other element is that access to capital is there now, but there is a big difference between the access to capital and the financing options available to a strong organization versus a weaker one; the gap between the haves and have-nots is bigger than ever. And I don’t really see that going back to the capital market world of 2006 or 2007, I really don’t. Everyone seems to think that, although the capital market has been improving gradually and will continue to do so, there will always be a gap now. If you look back about three years ago, there was virtually no difference in credit spread (difference in interest rates) between an AA hospital and a BBB hospital; there was very little difference in the interest rates they were paying. Today, both the public market and the bank-qualified market are differentiating much more.

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