Equipment Leasing & Finance Foundation

Long-Term Trends in Healthcare
And Their Implications for the Leasing Industry

Executive Summary


The long-term projection for Healthcare in the United States is for continued growth including growth in capital spending and growth in leasing as a means of financing the capital spending. However, it is important for lenders to note significant risks associated with providing credit to Healthcare providers. The analysis of data provided in Annex A of this report addresses specific characteristics of lessees and significant credit risks found in a sample of Healthcare leases. Additional risks include the fact that the government, at various levels, pays for services, regulates, and establishes a legal framework for the Healthcare industry. The government can change the rules at any time, which complicates forecasting cash flows for Healthcare companies. Labor risks include shortages of trained medical professionals including physicians, nurses, and other specialized medical personnel, as well as difficulty in expanding training programs due to lack of resources. Rapid changes in technology and equipment required pose additional risks. The significant reduction in inpatient hospital care and dramatic increase in outpatient services, as well as the increased use of pharmacological and biomedical treatment for medical problems must also be considered.

Healthcare in the 25-year period from 2005 to 2030 will be shaped by the interaction from a growing demand for healthcare from an aging population and the limit on the resources of society. This interaction will put a premium on productivity. Productivity gains will be driven by a wide variety of technology applications in the Healthcare sector, many of which will be financed by leasing.

The U.S. healthcare industry in 2004 was massive, representing a $1.8 trillion annual market that accounted for a very large share of the U.S. economy (15.4% of total Gross Domestic Product, i.e. GDP). Though many large private companies operate in the Healthcare sector, small, professional firms are the most significant business form in the Healthcare sector, followed by not-for profit organizations. Companies participating in the Healthcare sector included facilities companies, medical equipment companies, pharmaceutical companies, and health insurance companies including managed care companies and long-term care insurance companies.

In 2005, in addition to being very large, Healthcare is growing rapidly. Healthcare expenditures increased 9.3% in 2002, 7.8% in 2003, and 7.2% in 2004. Its percentage share of GDP has increased steadily in the 45 years since 1960 with its share of GDP growing from 5.0% in 1960 to 8.9% in 1980 to 15.4% in 2004. This growth reflects a long-term historical trend to rising Healthcare expenditures. In the future, Healthcare's share of GDP is expected to continue to increase every year to 2014 as Healthcare expenditures growth are expected to outpace GDP growth. Over the longer-term future, Healthcare is projected to grow to an even larger share of the national economy. Projected growths in spending for Medicare and Medicaid alone would drive total national healthcare spending to 22.9% of GDP by 2030 and 32.4% of GDP by 2050.

In addition to being very large and growing rapidly, the U.S. Healthcare industry has a high degree of inefficiency. The U.S. Healthcare system consumes a 50-100% greater share of U.S. GNP than countries in the European Union with no significant differences in the health qualities of the population by any standard measure such as life expectancies. There are six major forces impacting the future growth of the Healthcare industry. These are:

The first three forces listed tend to increase Healthcare costs while the next two tend to decrease Healthcare costs. Government policy is a wild card that can have a widely varying impact depending on the policy implemented.

Macro-trends in the Healthcare industry indicate a growth of the Healthcare industry in real terms as more people are treated by the system and a growing emphasis on productivity to contain both real growth cost pressures and inflationary pressures from labor shortages. An aging population with the percentage of the population over 65 growing dramatically over the next 25 years will substantially increase the demand for Healthcare. Current labor shortages of Healthcare professionals will get worse as training of new professionals does not offset growing demand and departure from the labor force of current health professionals. Technology, particularly information technology, should play a critical role in improving the productivity of the Healthcare labor force increasing the overall supply of Healthcare services.

The critical element in improving the productivity of the Healthcare industry and reducing its cost growth is capital investment in productivity improving technology that will substitute capital for labor. Providing the information technology to upgrade the Healthcare industry will require a major capital investment and will present a significant opportunity for the leasing industry. Substantial information technology expenditures by the Healthcare industry are to be expected if the Healthcare industry moves to a technology intensive, capital intensive approach to providing service.

A number of factors are converging to make the healthcare sector more receptive to lease financing. Included in these factors are the deteriorating financial situation of hospitals making them more receptive to leasing as an off-balance sheet capital source, the not-for-profit status of 85% of hospitals which closes public equity markets to them as a source of financing, and the large percentage of the Healthcare industry made up of physicians practices which are the classic small business with limited access to capital sources. This trend is already evident in the growth of leasing in its share of capital sources in the Healthcare industry in the period from 1997 to 2002. The growth of equipment leasing from $3.7 billion in new leases in 1997 to $5.8 billion in 2002 was not only an increase in the absolute volume of new leases but also in its share of all new funds with leasing accounting for 7% of new funds in 1997 compared to 16% in 2002. For the future, leasing should show even faster growth in the Healthcare sector than it has in the past if leasing companies use traditional best practices to provide high quality, knowledgeable service to the Healthcare industry. The demand for leasing will be there.

However, there are three major risks to the leasing industry in trying to fill the potential demand for leasing. The first is the weak credit quality of the Healthcare industry that will probably get worse in coming years. The second is the rapid evolution of Healthcare technology that could increase the rate of obsolescence of existing equipment and its value as collateral. And the third is changing government policy. Government policy and regulation, along with technology, will play the central role in determining the future of Healthcare. Government is the largest source of direct payment for Healthcare. How government reacts to the combination of an aging population, new Healthcare treatments, health worker shortages, and rising medical costs will be a central force in shaping the environment of the Healthcare area. If government chooses to try to control its Healthcare costs by squeezing reimbursement rates it could further aggravate the weak credit condition of the Healthcare industry and increase risks to leasing companies. Equipment

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