Just when it seemed things couldn't get worse for health-care companies, middle-market lenders have rated the industry the least appealing place to put their money.

More than two-thirds of lenders, 69%, named health care their last choice for lending, according to a survey to be released today by Phoenix Management Services Inc., a consulting firm in Philadelphia. That's up from 55% of lenders who named the industry "least attractive" during the second quarter.

"The sickest patient in the health care system may be the industry itself," said E. Talbot Briddell, president of Phoenix Management. "With declining reimbursements, the turmoil of managed care, and increasing discontent among physicians, lenders seem to be saying 'Industry, heal thyself.'"

The findings aren't likely to come as a surprise. A rash of health-care defaults has plagued banks during the last year. Hardest hit have been creditors to long-term health-care providers, which were already heavily in debt when a new Medicare payment system slashed revenues to those companies as much as 50%.

The quarterly Phoenix survey polled 94 institutions by mail during late July and early August. The survey, which aims to gauge the lending outlook for the following six months, included 46 commercial banks, 36 commercial finance companies, and eight other lenders.

Overall, respondents said they expect lending to all three major sectors -- large corporations, middle-market companies, and small businesses -- to remain the same during the next year. A decline in lending to corporations was predicted by 51% of respondents, versus 60% during the second quarter. The manufacturing industry remained the top choice for lenders surveyed, 82% of which said it was the most appealing.

Lenders also seem to be losing confidence in existing loans. Sixty-two percent said they expect bankruptcies to rise, and 65% said loan losses would rise during the next year, compared with 48% and 43% three months earlier.

"There's a lot of optimism about the economy," said Michael Jacoby, a Phoenix Management analyst.

"I suspect were going to see more attention being made in the credit policy of banks, and that will permeate throughout the banks and their customers."

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