Are you recession-proof? How the credit crunch affects medicine

You've heard the term "credit crunch" and predictions that the American economy is heading for a recession. But what does that mean? And more important, what does that mean for the medical industry?

While experts agree there really isn't a recession-proof industry, they also agree that if there were, health care would be it. When someone has a broken arm, fixing it isn't an optional expense.

But the patient's ability to pay for that care does ripple through the health care industry.

A credit crunch occurs when the secondary lending market collapses, causing banks to hold on to more loans, leaving less money to lend. Two or three years ago, when banks were able to sell loans as fast as they were making them, it was easier for businesses and individuals to secure a loan. Experts point at this ease as the root of the crunch, as subprime loans were made to people who couldn't afford them. Many of the borrowers defaulted, or landed in deep financial trouble.

Physicians are not immune to problems with personal finances. And a credit crunch may impact the financial standing of a private practice. Even physicians not in business for themselves may feel the crunch when it comes to where they work and their ability to find a new job.

Harder to get a business loan?

Reimbursement issues are nothing new to physicians. But it's the private payers most likely to cause problems during a nationwide credit crunch. Private payers, including those who have insurance but also high deductibles and co-pays, have less money to spend. And health care may not be a priority.

Even in a good economy, private-pay bad debt can be a problem, said Robert A. Guy Jr., partner with the Nashville, Tenn. law firm of Waller Lansden Dortch & Davis LLP. "But as the economy begins to turn downward, and we begin to look at all the problems that affect consumer incomes, you end up with more bad debt on your books."

"What that means," Guy said, "is physician practices or facilities where finances were already marginal are probably going to get worse. Those on the line will now go into the red."

Robert James Cimasi, president of St. Louis-based Health Capital Consultants, said this loss in income, combined with a practice's own loans for things like capital improvements or equipment purchases, may leave physicians looking for credit to obtain working capital.

"Working capital is very important because that's what [physicians] live on, since it takes a long time to collect accounts receivable," Cimasi said. A negative cash flow can make it difficult to meet monthly obligations to vendors and employees. And the problem is only exacerbated by a credit crunch, he said.

The economic situation is leading many physicians to rethink major investments, like technology, according to Guy. Despite the economy, there's still an industry-wide push for applications like electronic medical records. So it's likely more doctors will be pushing for hospitals to donate EMRs, Guy said. Whether hospitals will remain in a position to continue offering those donations, however, remains to be seen.

But the good news for physicians who still need to finance a technology purchase, expand a practice or purchase new equipment, is that lenders still see physicians as a safe risk.

"If I was a lender and I knew I had to lend money in order to make a living, I would look at physician practices," said Cimasi. "They have a good record and they have good assets to collateralize. There is a tight market, but physicians are an attractive place for them to give their money."

Alan Pontius, national director for San Francisco-based Marcus & Millichap's Healthcare Real Estate Group, agreed, saying that even as the residential real estate market has fallen flat, banks are more willing to lend money for medical space development. In fact, he says, the credit crunch may have resulted in more medical office buildings being built compared with a year ago. "We know financing is tougher to come by and underwriting standards are more strict, but one thing that's not changed is the rising demand ... for medical services," he said.

But physicians who haven't secured a loan in a couple of years will likely be surprised at the extra hoops they are required to jump through, experts say.

"There is far more scrutiny now, and rightly so," said Marc Lion, managing partner for the Lake Success, N.Y.-based accounting firm of Lion & Carillo LLP.

Curt Rosner, who heads the health care division of the Miami-based consulting and accounting firm Mallah Furman, said banks are analyzing business plans more closely and want to see how the practices plan to make money on an equipment purchase, for example, before they will lend the money to purchase it. He said it's not uncommon for the bank to look at accounts receivable and the age of those accounts.

The other big surprise facing credit-seeking physicians is that many banks now are requiring a personal statement of guarantee. In the past, Lion said, physicians were able to secure loans as a corporation, but that is changing.

Banks that still are willing to loan to the corporation without the personal guarantee generally will attach higher interest rates. That was the case for one of Lion's clients, who recently secured a $50,000 loan for equipment but had to do some searching before he was able to get the loan without a personal guarantee.

Personal guarantees are just one way a physician's business finances can impact personal finances.

Personal finances in jeopardy?

From a personal perspective, the credit crunch's impact on a doctor is no different than on anyone else, experts say. But physicians could easily have dug deeper into debt given their relative ease at securing loans.

Lion said even though everyone has heard about the real estate bust, many physicians are still being courted for real estate loans that are simply bad ideas. New physicians just coming out of residency are especially at risk.

The jump from a resident's stipend to an attending's paycheck can be a temptation to go big, he said. Just last month, he had a call from a physician client about to enter into a loan for a much bigger home with a much heftier mortgage. Lion admitted the client was upset when he told him it was a bad idea. But with the market direction uncertain, Lion said he advised him to wait six months. Too many clients, he said, have been talked into interest-only loans and also adjustable-rate mortgages, whose payments reset and ballooned in recent months.

Being stuck with a mortgage -- and the uncertainty of selling -- could also prevent physicians from seeking jobs in other areas. Lion said he would not be surprised to see more hospitals, especially those in areas with severe physician shortages, offer more contingencies that would allow physicians to start new jobs after they sell old homes.

Guy said many physicians who bought investment real estate are experiencing hard times as that income drops. He is hearing of more doctors looking for professional investments through ancillary services. Diagnostic services or cath labs are some of the revenue sources doctors hope to pull from local hospitals, he said. "You may see more physicians banding together to get single provider numbers to provide those in-office services."

But as more physicians do what they can to protect their own financials, it could eventually have an impact on hospitals, Guy said.

"If there are a lot of private-pay bad debt issues at hospitals, the physicians with privileges may be less willing to perform on-call and similar duties because of the risk that they will not be well reimbursed. The result is hospitals may need to take on extra expenses to fill those positions," Guy said, adding that hospitals might review their contracts with admitting physicians to make on-call duties a contractual obligation.