Overview: Assessing hospital companies’ capital expenditures

Average capital investment in hospitals

Hospitals invest in capital projects to boost profitability. Capital projects in the hospital sector include purchasing new facilities, purchasing medical equipment, renovating and replacing existing hospitals, and investing in information systems infrastructure. In the absence of these investments, hospitals aren’t able to stay competitive in terms of quality of care, patient satisfaction, efficiency of service, and, finally, hospital prices and profits.

Comparing HCA Holdings (HCA), Tenet HealthCare (THC), Community Health Systems (CYH), LifePoint Hospitals (LPNT), and Universal Health Services (UHS)—which are five large hospital chains in the U.S.—reveals that the average capital investment in the U.S. per facility in 2013 has declined from 3.8 million per facility to 3.6 million per facility. You can attribute this finding mainly to constrained hospital revenues, as Obamacare provisions have effected a change in the hospital reimbursement model.

Sources of funding in hospitals

In the environment of regulatory change, hospitals also have limited access to external capital. Tax-exempt bonds are the most critical source of funding for hospitals, followed by banks, philanthropy, taxable bonds, and venture capital. Access to capital by tax-exempt bonds mainly depends on the credit rating of the hospitals. Agencies like Moody’s and Standard and Poor’s rate hospitals to assess their investment risk.

According to the American Hospital Association (the AHA), this dependence on credit ratings for funding has created a downward spiral for hospitals. Credit ratings are an indicator of hospitals’ financial health. If financial health is poor, then creditworthiness is low. These hospitals have less access to capital, which restricts their capacity to invest in improving efficiency. This again leads to further weakening of hospitals’ financial condition.