What's your game plan? The capital markets want to know-really: is it a good idea, in the real world, for hospitals to withhold their long-term strategic plans from prospective investors?

Healthcare Financial Management, March, 2006 by Kevin T. Ponton, James Welch

Although it is considered best practice to share such information with investors (i.e., the "capital markets"), the reality is that all too many hospitals and health systems are not so forthcoming. The attitude of too many of these organizations' leaders is that they have a right to keep certain information about their strategic plans and projected financial performance confidential. But what's wrong with that attitude? The expression "shooting yourself in the foot" comes to mind.

Consider the following hypothetical example that typifies some actual conversations that have transpired between healthcare provider organizations and investors.

The question and answer portion of a telephone conference call is hosted by a large health system and its underwriter, and includes hospital credit analysts for a number of large institutional investors interested in the system's imminent sale of tax-exempt revenue bonds. As expected, the system's CEO and CFO have presented a summary of the information they had distributed earlier that week in the preliminary official statement, and they are fielding questions from the buy-side analysts.

Q. (Buy-side analyst): You've posted operating losses in each of the past three years. Could you share with us your budget for the current fiscal year?

A. (CFO): We don't share such forward-looking statements with general investors.

Q. (Buy-side analyst): But the report by one of the national rating agencies implies that your history of meeting budgets needs improvement. Surely you had shared your budget with them?

A. (CFO): Yes, we did. But we don't share budgets with general investors due to the forward-looking nature of such statements.

Q. (Buy-side analyst): Well, then, could you give us a rough approximation of whether you will return to operating profitability within the next fiscal year?

A. (CFO): We will do better than we did last year, but we can't say any more than that.

Q. (Buy-side analyst): So can you say when you expect to be at a break-even from operations?

A. (CFO): Sometime in 2008.

Compare that interchange with the following section from hfm's November 2005 cover story by Mark E. Grube and Therese L. Wareham ("What's Your Game Plan? Advice from the Capital Markets"):

    Capital market players require extensive    financial data regarding forthcoming plans and    the achievement of or shortfall from past    plans. "Need-to-know" elements of financial    plans that enable the capital market players to    assess the success, or lack thereof, of organizational    strategies include financial projections,    financial goals, capital expenditure requirements,    debt capacity and cash requirements,    capital position, and profitability targets. 

Quite a contrast, wouldn't you say?

Let's dig a little deeper: Could it be that the experts interviewed for the hfm story are encouraging adherence to an ideal level of strategic vision, but don't actually require it in the final

analysis? Apparently not: One of the experts interviewed for the hfm story, James Andrews, Jr., managing director of Health Care Finance, Financial Security Assurance, said, "If a hospital does not prepare a multiyear capital plan or projections, it would be difficult, if not impossible, for us to insure its bonds."

If bond insurers, who analyze the strongest hospitals in the credit spectrum, consider a multiyear plan to be a best-practice requirement, then shouldn't the capital markets require the same from hospitals on the lower end of the credit spectrum as well? If so, how can the requirement be enforced?

The answers to both questions lead back to the example of the investor telephone conference call mentioned earlier in this column. Consider that this health system has consistently received a rating of BBB--from each of the leading ratings agencies. Such a rating is at the lowest investment-grade category above speculative grade, and the price (or interest rate) differential between investment grade and speculative grade is much more costly to an issuer than the differential between rating categories within the investment-grade level. So one would expect such an organization, rated at the low edge of investment grade, to have a clear incentive to demonstrate every managerial strength at its disposal to obtain the lowest possible cost of capital in an increasingly picky investor environment.

Certainly the potential investors on the conference call had that expectation and, hearing the health system leaders' response to their questions, could have reached one of the following conclusions:

* The system's leaders indeed have the expertise and the strategic vision, but simply can't be bothered with the extra effort required to demonstrate that vision to yet another audience of outsiders.

* The system's leaders can't articulate the strategic vision because they simply don't have one.

Some underwriters might defend the approach of our hypothetical health system by arguing that the markets arbitrate these issues and vote with dollars. In some instances, they may get comfortable with a less than ideal credit and buy it, or they may reflect their concern by buying at a marginally lower price (higher interest rate). Or they may be dissatisfied enough to walk away. Whatever the case, no one will ever be able to quantify the difference to the hospital.