Economic slowdown pushes medical facilities development onto life support

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By Tom Ahern

Senior Vice President, The Saint Consulting Group

The global economic slowdown, exacerbated by tight credit markets, flat retail sales and rising unemployment in the United States, has moved beyond commercial real estate to claim its first victims in the healthcare sector.

healthcareNew hospitals, medical office buildings and outpatient surgery centers, which only months ago were slated for starts in 2009, have been shelved indefinitely as money woes cause hospital administrators and foundations to rethink their spending plans. The result for these decisions is a slowdown in one of the last development sectors in the US and an uncertain future for the healthcare industry.

The evaporating margins at both non-profit and for-profit hospitals in the US has also caught the attention of bond rating agencies, which have been lowering the outlook on debt issued by both large and small hospitals. The lower ratings have increased the cost of borrowing at a time when credit is already scarce. A November 2008 survey of over 700 hospitals by the American Hospital Association found that 58% of hospitals in the US were planning to delay or cancel new development projects and 45% were considering canceling equipment purchases.

One notable example of the global credit and economic crisis touching the healthcare world includes Penn State Hershey Medical Center, which announced in December that it was delaying construction of its planned, $235 million Children’s Hospital project. Hospital officials cited the global economic slowdown as a driving force in its decision to put off the January groundbreaking. The Detroit Medical Center also recently announced the delay of their own much-needed renovation and expansion project.

The slowdown in healthcare projects has also been accelerated by investors’ concerns about the financial viability of these developments. Medicare reimbursements from the states are facing cuts, rising unemployment has led to more Medicaid and charity care cases, and profit margins at leading hospitals have been adversely affected. Add to that the losses faced by many charitable foundations through investments in the equity markets, and our nation’s healthcare development prospects have slowed to a crawl.

At a recent Real Share conference focusing on the development of medical office buildings, experts from healthcare, development and the financial markets seemed to agree on one thing- the combination of a prolonged economic slowdown, scarcity of debt and financing opportunities and lower earnings and profits has created a trifecta of heartburn for those responsible for building the nation’s advanced healthcare facilities.

For related news, see the Business Journal of Greater Milwaukee’s story by Corrinne Hess and the BBC’s report on credit warning for hospitals in Britain.

What about you? Have you seen evidence of a slowdown in the medical facilities sector?

Tom Ahern is senior vice president for health care and equities, email ahern@tscg.biz or call 781 749 7290 ext 7144.

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