Healthcare IT Firms Face Cash Crunch Due to Credit Crunch: Analyst

Firms that supply hospitals and other healthcare providers with healthcare technology that improves revenue management and operational efficiencies are facing cash flow problems due to the credit crunch, according to an analyst that follows the field.

James Kumpel with Arlington, Va.-based Friedman, Billings, Ramsey & Co. warned investors that these firms are being hurt by the weak market for auction rate securities, a type of bond they have relied on to finance their growth.

Kumpel said some of the faster growing companies in healthcare IT, including Eclipsys, have “disturbingly high exposure” to auction rate securities, bonds whose rates are reset regularly – sometimes weekly – at auctions.  Kumpel said a series of unsuccessful auctions have left investors concerned about liquidating these bond assets in a weak financial market.

“When cash needs are immediate to conclude a transaction, the overexposure to auction rate securities can lead to lower deal values or higher financing costs to access liquidity,” Kumpel said Wednesday in a note to investors.

That’s what happened to Eclipsys, which provides integrated clinical, revenue cycle, and access management software. According to Kumpel, the Atlanta-based company had to swap $90 million worth of auction rate securities with Goldman Sachs for $45 million in cash in order to complete its acquisition of Enterprise Performance Systems, Inc. Kumpel said Eclipsys had to make the swap because more than 87 percent of its $191 million in cash in the fourth quarter of 2007 was held in auction rate securities.

“Those companies with liquidity needs and short-time horizons may face the unfortunate prospects of markdowns and impairment charges,” Kumpel said.

Kumpel said HLTH Corp., a holding company for IT companies serving the healthcare industry, has more than $100 million tied up in auction rate securities. HLTH and WebMD, an online portal which provides health information services for consumers, physicians, healthcare professionals, employers and health plans, announced in February plans to merge. But Kumpel said HLTH’s exposure to auction rate securities is causing its shares to trade at a discount, despite an implied premium the deal would bring.

Kumpel said some companies may be forced to reclassify their auction rate securities as long-term assets, while other companies may need to consider impairment charges, which could impact earnings.