August 6, 2012 / 2:47 PM / 7 years ago

TEXT-Fitch: ARRA funds well-timed for U.S. hospitals

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.
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