Recessions usually don’t rattle hospitals. But this one’s different, according to hospital executives.
Tighter credit, losses on investments and a projected increase in care for uninsured patients have some local hospital executives thinking twice about shelling out cash for expensive medical equipment.
“I would say that every single facility in Orange County, probably California and likely the nation” are watching what they buy, said Barry Arbuckle, chief executive of Memorial Health Services, a Fountain Valley-based hospital operator with three OC facilities.
Arbuckle also chairs the Sacramento-based California Hospital Association, a trade group.
The situation is a break from the conventional thinking that hospitals are recession-proof because they treat the most urgent patients regardless of economic cycles.
“When we’ve had recessions in the past, they likely weren’t coupled with the capital market meltdown, the freezing of debt availability for hospitals and the precipitous drop in the equity market,” Arbuckle said.
Those complications come on top of a standard worry for hospitals during downturns: that rising layoffs could spur them to dip into their cash to cover the costs of treating patients who don’t have insurance or are covered by Medi-Cal, which pays hospitals only pennies on the dollar.
The hospital cautiousness seems to be hitting medical device makers, which traditionally are seen as resistant to economic downturns.
Shares of Beckman Coulter Inc., a Fullerton-based maker of medical testing instruments and supplies, are down some 40% for the year on a market value of about $2.7 billion.
Irvine-based Masimo Corp., which makes patient monitors and disposable equipment, are off about 30% for the year with a recent market value of $1.6 billion.
Even Edwards Lifesciences Corp. of Irvine, which is up about 15% for the year on a value of $3 billion, is concerned.
It would be “na & #271;ve” to think that economic turmoil wouldn’t affect the industry, Chief Executive Michael Mussallem said.
Edwards’ heart valves and related products are used in critical situations and are paid for by health insurers. But some patients “can and do delay heart valve procedures” and the economy “can influence the timing of their surgeries,” Mussallem said.
Siemens AG, the German medical device maker that competes with Beckman and Tokyo-based Toshiba Corp.’s Toshiba America Medical Systems Inc. in Tustin, recently released a survey that showed 35% of its customers are operating under capital spending freezes.
“Say if we have two (computed tomography scanners) and we have capacity for three, we may hold off on that third one,” said Darrin Montalvo, chief financial officer of St. Joseph Health System, an Orange-based Catholic hospital operator with three local facilities.
CT scanners are among the most expensive devices for hospitals, costing up to $3 million, Montalvo said. A magnetic resonance imaging machine can cost $500,000, he said.
“We are putting on hold projects on equipment just to be prudent,” Montalvo said.
St. Joseph tends to use cash generated from operations to buy devices rather than borrowing, Montalvo said.
Even so, tighter credit has caused St. Joseph to adopt a cash-conservation mode, he said.
“Without the ability to go into the market to borrow, that limits your liquidity,” he said. “So you need to make sure you have enough cash available just to withstand whatever may happen.”
St. Joseph owns St. Joseph Hospital-Orange, St. Jude Medical Center in Fullerton and Mission Viejo’s Mission Hospital.
If a hospital needs to borrow money to buy equipment, higher interest rates could give them pause, said Dennis McCarthy, a managing director with B. Riley & Co., an investment bank with offices in Newport Beach and Los Angeles.
A hospital or hospital system could stick with existing gear it’s satisfied with if it can’t get favorable financing, McCarthy said.
And, like everyone else, hospitals are losing money on investments amid Wall Street’s decline that started in the fall, said Mike Alkire, president of San Diego-based Premier Inc.’s Premier Purchasing Partners unit.
Premier’s local customers include Hoag Memorial Hospital Presbyterian in Newport Beach, St. Joseph-Orange and St. Jude.
“Many hospitals were already working with razor-thin operating margins,” Alkire told trade publication HealthLeaders Media. “Without investment income, the pressure increases exponentially.”
For more on this story, see the Dec. 29 edition of the Business Journal.
