The hallmark of any successful industry is relatively easy access to inexpensive capital. The more confidence the capital markets have in an industry, the easier to obtain and less costly capital becomes. The reverse is also true: If capital market do not have faith in the future of an industry, capital will be more difficult and expensive to come by.
Recently I had a conversation with Dan Cain of Cain Brothers, investment advisers to the health care industry. We talked about how Wall Street is beginning to view health care and what conclusions can therefore be drawn regarding the economic future of the industry.
Cain notes that the major publicly traded hospital companies' earnings, price-to-earning ratios and stock prices have been relatively tepid over the last several months. In addition, he says, the tax-exempt bond market, a principal source of capital for not- for-profit hospitals, is likewise having a lukewarm view of the health care industry. Many not-for-profit hospital systems in this country have had their economic outlook changed from positive to negative, and a substantial number have actually had their bond ratings downgraded. The future, with a huge bite taken out of payments to health care providers by cuts to Medicare, looks rocky. The situation is bad enough that a recent issue of Modern Healthcare says that dozens of hospitals across the nation are moving down a "path of destruction... marked by downgrades, defaults and even bankruptcies." It's no wonder, then, that debt and equity markets are beginning to take a jaundiced view of health care as an investment opportunity. And as the health care industry finds it increasingly difficult to raise the kind of capital it needs to sustain itself, there will be some fairly significant consequences. Low margins and a squeeze on capital will encourage and in some cases force additional consolidation of hospitals and health care systems. We've already seen a fair amount of consolidation, but so far it's been driven more by the desire of industry players to build integrated health care systems than it has been by economic necessity. If the squeeze becomes as acute as many think, the only alternative to bankruptcy will be additional consolidation. There are other factors which will affect the move toward consolidation. It's clear that the future of private health insurance is moving away from defined contribution plans to defined benefits. The whole concept of premium support was a favored feature coming out of the Medicare Commission. The voucher system concept is basically built around the concept of giving people (whether they are Medicare recipients or private employees) a fixed amount of money and letting them chose from options that vary according to how much they want to add out of their own pocket for their health care coverage. As the population ages and as the ability to live longer comes into play, our senior citizens are increasingly faced with difficult decisions. In the past, there was never a question whether a 75- year old individual would get a hip replacement. …