liquidity

HIT M&A volume up, but vendors otherwise shaky

Wed, 16 Apr 2008 06:59:56 -0400

Despite recent turmoil in the financial markets, health IT M&A transactions have had a strong few months. During the first quarter of 2008, 57 HIT deals were announced, equal to the number of deals announced in Q1 2007, according to a study by Healthcare Growth Partners.

Not only did deal flow keep pace, valuations of companies involved actually grew.
The median revenue multiple in such deals made a big jump in Q1 2008, hitting 2.1x, as compared with 1.4x during the same quarter last year. Meanwhile, the median EBITDA multiple climbed too, rising to 14.2x compared with 13.4x for 2007. More than half of the deals were for less than $50 million, though a few--such as the Misys/Allscripts combination--were valued at over $100 million.

Such deals aren't necessarily a sign of industry health, however. In fact, some HIT vendors--particularly those supplying revenue management and operational systems--are facing serious cash-flow problems. Many of these vendors, whose business often requires high liquidity, are very reliant on the troubled auction-rate securities market, analysts say. Given such pressures, it seems likely that this sector is going to be the next within HIT to face a significant consolidation.

For more industry research on HIT consolidation:
- read this report (.pdf)
- read this article from InsideARM

Related Articles:
Healthcare M&A likely to keep pace in '08
Angel investors like health IT
New investment venture targets cost-cutting health IT

Non-profit finances deserve second look

Wed, 02 Apr 2008 07:59:59 -0400

Looked at one way, it's easy to see why an agency like Moody's would be less than enthusiastic about the financial prospects of not-for-profit hospitals. Just consider what's going on in many instances:

Falling revenue
Worsened liquidity
Increases in charity care burdens
Capital availability issues due to tightening of the credit markets

It's a pretty depressing picture, I'll admit, and one that shouldn't be taken lightly. These forces have indeed managed to sink some non-profits already, and will, without a doubt, impact more heavily.

In fact, looking at stories like the one below, in which a for-profit HCA rode in on its white horse and pumped more than a half-billion in capital into a former non-profit chain, you might think that the solution to U.S. healthcare woes is to go for-profit all of the way.

However, that would be far too narrow a reading of the facts. If you look at the non-profit sector in terms of its effectiveness, you'll get a much different picture. As any non-profit hospital exec would tell you, they may be operating at a deficit, but they're providing a lot to their community, including direct charity care, community education and other benefits.

I understand why ratings firms like Moody's look only at the metrics that interest for-profit investment houses; that is, after all, what they're paid to do. But it seems to me that relying too heavily on such ratings provides a distorted picture of the mission and financial structure of non-profits.

As for me, as an analyst I'd be far more interested in an analysis that included some sort of "mission" index (how effectively the hospital was fulfilling its charitable purpose). Certainly such an index would have to include calculations that weighed its ability to deliver financially. But the metric would weight delivery of community benefits far more heavily.

What do you think? Should non-profits take control of how their financial story is told, and how much emphasis is placed on their charitable accomplishments? Write to me and let me know. - Anne

Moody's shows little enthusiasm for non-profit hospital finances

Wed, 02 Apr 2008 07:59:58 -0400

It's tough to find there, buried within the careful language, but I think the net of the recent "special comment" from Moody's Investors Services might be that the agency is cautiously pessimistic about the financial future of U.S. non-profit hospitals. In the special comment, which addressed its preliminary fiscal 2007 median ratios for not-for-profit hospitals, the agency said that, in essence, while the hospitals are still making it, analysts aren't wild about the future. They note that key volume and revenue growth measures aren't doing much to excite them, which suggests to analysts that full-year fiscal '07 medians may not hold up. Add that to the fact that hospitals are losing ground when it comes to liquidity, and you've got some real concerns for both for-profit and not-for-profit facilities in 2009 and 2010, as the agency noted in January.

What can the hospitals do to avoid a scary future? Well, for one thing, Moody's has let it be known that if they institute quality incentives, non-profit hospitals might get better credit ratings from them. Well, folks, there you have it. Problem solved!

To learn more about Moody's take on not-for-profit hospitals:
- read this HFMA News item

Related Articles:
Financial challenges in future for U.S. hospitals. Report
Incentives could boost credit ratings for non-profits. Report
Ratings firms slam nonprofit hospital finances. Report
Health IT plans affect financial ratings. Report

HealthSouth gets credit upgrade, but questions remain

Wed, 19 Mar 2008 07:59:56 -0400

For HealthSouth, it looks like a good news/bad news situation in terms of feedback from key financial ratings firm Moody's Investors Service. On one hand, Moody's affirmed the B3 corporate family rating for HealthSouth Corporation, despite some questions about its future. Moody's also upgraded the rating on the company's senior secured credit facility from Ba3 to B2, though it left the rating on the company's senior unsecured notes at Caa1. The upgrade on the senior debt came because Moody's analysts expect that HealthSouth will be able to make more progress on its secured term loan. Moody's also seems to think HealthSouth will have adequate liquidity for the next few quarters, not a bad thing to hear from a ratings agency.

However, this comparatively good news did come with some caveats. For one thing, Moody's notes, "the key financial metrics remain weak for the single B rating category." Among other problems, the company still is highly leveraged, has limited interest coverage and modest cash-flow coverage. Analysts also noted that (like other healthcare providers) HealthSouth faces some meaningful risks because of its reliance on government reimbursement, particularly given its focus on inpatient rehab, which is under scrutiny by federal bean counters.

However, Moody's still believes that HealthSouth can improve its operating and credit numbers over the next few quarters, and if Medicaid, Medicare and SCHIP Extension Act of 2007 passes, inpatient rehab services will be under less pressure to meet regulatory guidelines. Not only that, with the company having put some of the bad ol' Scrushy days behind it by paying settlements out, it can now pay more funds back into the business. Moody's says it could see upgrading its ratings if HealthSouth improves operating performance, credit metrics, expensive savings and debt reduction. (It's worth nothing, though, that HealthSouth was forced to pay out $15 million to settle a kickback case as recently as December of last year, so not everything has changed!)

To learn more about HealthSouth's credit situation:
- read this CNNMoney.com piece

Related Articles:
HealthSouth settles for $445M. Report
HealthSouth shows more healthy numbers. Report
HealthSouth continues restructuring. Report
HealthSouth touts expansion plans. Report

Painful cash crunch leaves few good options

Wed, 12 Mar 2008 07:59:59 -0400

Painful cash crunch leaves few good options

Wow, things are still painful out there. Even if your facility had auction-rate bonds outstanding, and managed to bail out of them successfully, you're not necessarily in the clear.

If you assumed that you could turn to other standard financing sources, such as revolving bank loans and asset-based lending, don't be so sure. Of late, banks are pulling out of revolving loans, and even asset-based lenders are getting a bit gun-shy, according to the financial press. And it's hard to say when things will loosen up.

Of course, this issue extends well beyond healthcare providers, but given the cash flow issues providers face--with health plans holding them hostage--it's a particularly nasty situation. That's especially true given that many hospitals, in particular, have massive capital projects planned, both on the facilities and IT side of things.

Of course, providers do have other financing options, such as factoring their receivables, but those come at what can be a pretty high price, and they can be complicated to administer. (Besides, if I were a factoring company, collecting from health plans would not be my favorite line of business.)

Given these pressures on liquidity, it's hardly surprising that many providers are beginning to demand patient co-pays and deductibles up front (see story, below). But asking for big up-front payments can lead to charges that you're squeezing out the poor--particularly if you're a non-profit--so you pay a price for this approach too.

The bottom line is that providers are going to be sweating bullets for a while as the banking industry recovers from the subprime lending catastrophe. In the meantime, managing your cash is going to be a one-day-at-a-time kind of thing. - Anne