Aug 6 - Fitch believes that the distribution of "meaningful use" funds to hospitals under the American Recovery and Reinvestment Act of 2009 (ARRA) is positive for hospitals, providing them with a timely source of additional funding as revenue growth in the sector remains constricted. However, Fitch also believes that bondholders should be aware that this revenue is a nonrecurring source of funding and only partially offsets the capital costs hospitals have to absorb to implement these IT systems. Hospitals are eligible to receive both Medicare and Medicaid electronic health record (EHR) incentive payments by demonstrating that they are meaningful users of EHR technology. Once providers qualify for the funds they can receive payments over a period of four years. According to the Centers for Medicare and Medicaid Services Web site, over 3,000 hospitals have received incentive payments through June 2012 totalling $4 billion. Medicaid EHR incentive payments are administered by states voluntarily. Several states including District of Columbia, Hawaii, New Hampshire, Minnesota, and Virginia have not yet begun disbursing funds While ARRA funding is not a significant portion of a hospital's total revenue, we believe it is important for bondholders to recognize that otherwise anemic revenue growth may be masked by these nonrecurring funds over the next four to five years. Only hospitals that are already financially strong will be able to afford the high cost investment in EHR technology. Hospitals unable to demonstrate meaningful use by 2015 will be penalized through their Medicare reimbursement. We expect this to lead to a wider gap between higher and lower credits. In a report released by Fitch that surveyed hospitals on capital spending, we found that 45% of hospitals expected to increase their capital spending in the next five years and that investing in IT was the highest priority item above building inpatient and outpatient capacity. Mitigating some of the concerns on the fading out of ARRA incentive funds is the gains in quality, efficiency, and costs that the effective use of these newly implemented IT systems can provide. We have already seen a number of providers materially improve operations after their IT implementation. And, we believe the need to implement IT systems is one of the drivers in the current wave of hospital consolidation. We expect this pressure to continue as 2015 approaches. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.