Not-for-profit healthcare organizations increase cash, reduce debt to improve financial performance - Industry Scan

Healthcare Financial Management, August, 2002 by Carole J. Bolster

Facing increasing costs and reduced payments over the past few years, healthcare organizations were challenged by Wall Street to demonstrate why hey should receive investment capital. Many investors have viewed hospitals as a poor investment risk because of declining profit margins dwindling market share, and increasing cost pressures. Many investors felt that hospitals were under invested in capital. Hospitals that sought capital to improve their infrastructures found investors scrutinizing their performance. Asia result healthcare organizations have had to tighter their belts and demonstrate improved bottom lines to prove their credit worthiness.

At the third Annual Non-Profit Health Care investor Conference held in New York. New York in May executives from 26 not for profit healthcare systems and health plans came together with representatives of more than 55 major institutional investors to discuss the strategic responses and direction that healthcare organizations are taking in response to the challenges they face. Sponsored by Salomon Smith Barney, HFMA and the American Hospital Association the conference was designed to enhance communication between the not-for-profit healthcare sector and the investment community. The 350 attendees this year included executives from 25 not for profit healthcare systems and one health plan system and representatives of major institutional investors, bond insurers and the three major rating agencies (Pitch, Moody's and Standard & Poor's) Representatives of other capital markets attended as well, including issuing authorities, commercial lenders, and real estate investment trusts.

KEYNOTE SPEAKERS

Deborah J. Lawson, director, equity research division, Salomon Smith Barney, New York, New York, told attendees that although increased copayments are expected to be implemented by insurance plans, collecting these payments will be a challenge She recommended that hospitals implement methods to gain payment up front. On a more positive note, Lawson told attendees that many markets are seeing significant capital spending for such reasons as hospital expansions. Many healthcare organizations are operating at capacity, while the aging population will drive increasing utilization.

She noted that the healthcare industry is moving away from acquisitions. Many health systems have divested nonhospital assets, and few large mergers are taking place. Labor is the top cost issue facing hospitals. Because of a shortage of nurses and unskilled labor, nurses are demanding more flexibility and higher wages. Wall Street is looking favorably on stocks of temporary labor utilization firms, particularly temporary and travel nurse staffing companies, Lawson said. Finally politics continues to challenge the healthcare industry, as various provider groups negotiate for increased payment, she noted.

Ruben J. King-Shaw, Jr., deputy administrator and chief operating officer, Centers for Medicare and Medicaid Services (CMS); Washington, D.C. told conference attendees that the key issues facing CMS in 2002 include educating senior citizens about their healthcare choices, opening up the agency to create a culture of responsiveness, ad sharing with policymakers the financial information that is available to investors. He said CMS is changing the way it does business, becoming a better business partner and helping to change the financial structure of the healthcare system CMS needs to lead the change, he added.

William O. Cleverley, PhD, president, Cleverley and Associates Columbus, Ohio, noted a dramatic shift in the types of hospitals that have closed over the past few years from urban to rural. He cited ignorance, greed, and empathy as reasons many organizations fail to see financial irregularities. He said if healthcare executives look at data objectively and understand what they see, they can detect financial problems in advance. Then, if they see a problem, they should take action. four dimensions of financial strength are profits, cash and investments, debt position, and age of physical facilities, Cleverley noted. Two key financial goals of healthcare organizations are to maintain return on equity and maintain financial strength. Cleverley observed that hospitals close primarily because of poor profitability, likely due to higher costs, higher length of stay, smaller market share, and less favorable payer contract.

OPTIMISTIC OUT LOOK

Healthcare executives attending the conference were optimistic about developing successful strategies in response to the challenges they face in the dynamic healthcare environment. Such challenges include inadequate Medicare and Medicaid payment, operating at or near capacity, the volatility of the equity markets, providing care to the uninsured, contending with a labor shortage, and meeting the rising demand for services due to an aging population and medical advancements. Most not-for-profit healthcare organizations have been challenged by payments that were less than the cost of delivering care in the 1990s. Many have faced the need to expand their facilities as well as increase their workforce because of capacity constraints. Because of the volatility of the stock market, these organizations cannot rely on their investments to bolster revenues.