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
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
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
down a "path of destruction... marked by downgrades, defaults and
It's no wonder, then, that debt and equity markets are beginning
to take a jaundiced view of health care as an investment
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
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-
old individual would get a hip replacement. …