A financial fitness regimen for improved capital access: here are five steps you should take now to improve your hospital's access to capital

Healthcare Financial Management, June, 2005 by Kevin T. Ponton

As many as one-third of U.S. hospitals have credit ratings or belong to health systems that have ratings from one of the national rating agencies. The remaining 65 percent to 75 percent of hospitals in the country have no rating, probably do not expect to get one anytime soon, and therefore have a more restricted menu at Capital Finance Restaurant.

Informed forecasters expect levels of uncertainty (read "risk") in the hospital sector to rise significantly by 2015, with a sharp increase beginning as soon as 2006 or 2007. Years from now, these first few years of the century will look like the end of an era--indeed, the end of the good old days of capital access.

On the brighter side, the nice part about uncertainty is that it disguises both good and bad opportunities. Even a negative forecast offers some good opportunities.

What Can You Do?

Assume you're the CFO of an institution in the un-"rate-able" category. What can you do to improve your likelihood for success in the hard times to come? Just follow these five steps.

1 Copy the best practices of "the other guys." For years now, hospitals and health systems with good credit ratings have adopted some of the successful disciplines and tactics of proprietary firms, focusing on developing and maintaining regular positive relationships with the credit and capital markets.

For example, I was stunned about 15 years ago when the CFO of a large Catholic health system told me he was coming to New York to visit the rating agencies and bond insurers. He had no specific capital project in mind, was not being squired by his banker, and was planning to visit several credit enhancers in addition to the one he had most recently engaged. And he wasn't planning just to chat. He had prepared a formal presentation on his system's strengths, weaknesses, opportunities, and threats. Why? His answer: "We did it semiannually when I was working for Hertz, and it was well worth the effort." Since then, most of his counterparts have adopted this practice, expanding their visits to include the large firms that have purchased or traded their bonds.

The best practice to emulate here is this CFO's focus on the value of doing something concrete now that will enhance an undefined future project or relationship. His focus was on an expanded strategic horizon of capital needs, and he kept it continually on his dashboard along with the myriad other activities of a hospital CFO.

You need not be a member of the rate-able 25 percent to develop an expanded horizon for capital needs. A small rural hospital could put eventual critical access status on its expanded horizon. A designated critical access hospital could put qualification for a Housing and Urban Development/ Federal Housing Authority mortgage guaranty on its expanded horizon. And a critical access hospital with an existing FHA-guaranteed mortgage should have, on its expanded horizon, a plan to deal with the possibility of a loss of cost-based payment (definitely a negative possibility, but a possibility nevertheless when your horizon expands to the next 10 years).

2 Dispel the myth that all of your low-hanging fruit has been harvested. Conventional wisdom holds that, after years of cost-consciousness, the bulk of cost inefficiencies and waste have been forever banished from most hospitals. That conventional wisdom is wrong. Harvesting the benefits of efficient operations should be an ongoing process that doesn't end after a major initiative. Big organizations change slowly, and retrogressive management behavior can continue to plague them years after a crisis management overhaul has dealt with the most immediate problems.

Give yourself a quick reality check: Have you pruned any services in the past five years? If your answer is no, reconsider. If necessary, engage a capable third party to evaluate your core services so you can be ready to make the difficult decisions when generalized uncertainty for the industry as a whole transforms itself into a specific challenge for your own facility.

3 Cultivate relationships with bankers who know operations and with operations consultants who know finance. Bankers have traditionally steered clear of operations-related advice, even when there is a direct correlation with their client's capital fitness. Similarly, consultants with expertise in operations improvement have tended to surrender the entire capital finance field to bankers. Both tendencies probably grew from the decades-old, once-useful distinction that made bankers the arbiter of a hospital's balance sheet and the operations consultant the expert on a hospital's revenue statement--that is, in the days when a hospital's most powerful security for external capital (debt) was a mortgage on its assets. Times have changed, most hospital assets have been fully mortgaged, and revenue streams are the security of choice (at least when all mortgage-able assets have been encumbered).

Protecting and improving the hospital's revenue stream is now the primary focus of both bankers and operations consultants. So it makes sense that bankers should be unafraid to recommend, for example, that a client improve its benchmarking capability or perform business-line audits of key services. Operations consultants should be able to respond as confidently to the credit implications of a particular strategic initiative as they are to the initiative's revenue-enhancement implications.