Access to capital is a major issue for hospitals and hospital systems. Across the country the need is evident for all size systems, from the largest to the smaller community hospitals. Capital access is more of a challenge for the mid to small size hospitals, than the larger ones.
Planning is a strategic issue in the management of most corporations, including healthcare. Progressive organizations demonstrate a clear link between strategic and capital planning. A strategic plan for the organizations future success drives capital planning and spending. Such plans address community needs, competitive strategy, physician resources, and opportunity for improved profitability.
In the 1980s and 90s, healthcare began to embrace the whole issue of the planning process by moving beyond the brick and mortar, to strategic issues; such as market retention and penetration, physician retention and recruitment, scope of services, customer satisfaction, and other hospital specific issues dominating their markets. However, strategic planning in healthcare still includes a strong focus on the physical plant. The HFMA recently reported in a publication Financing the Future (2004) that the majority of capital spending plans are just focused on the upkeep of deteriorating fixed assets plant, property and medical equipment. One third of the CFOs surveyed said their hospitals were in worse condition than they were ten years ago, and nearly 50% believe that their infrastructure is deteriorating faster than they can make capital improvements.
Financial planning, particularly for the mid to small size hospitals, revolved around their budgets and capital needs for the current budget year. The regulations that require capital budgets to be developed beyond the current fiscal year were generally met through the capital budget process, where those items that didnt make the cut on this years budget were moved to year two or three, and so on. This dynamic is not a criticism, but the reality of the industry.
Healthcare has evolved from a period in the early 1960s and 70s, when Hill Burton grants were given to hospitals for physical construction, to the present reliance on the capital markets. The management expertise also evolved. Until Medicare came on the scene in 1965, financial expertise may have been limited to a bookkeeper. Medicare alone changed this scenario. Healthcare began to hired sophisticated financial executives. Todays larger systems have individuals on their staff that specialize in cost accounting, third party cost reimbursement, investment portfolios, etc. However, many of our mid to small size facilities can not afford these kinds of sophisticated personnel, nor are they necessarily able to recruit them to their facilities.
While it is necessary to devote as much time as we do to realistic capital planning for physical plant growth, it can be restricted by a lack of planning expertise in the mid to small size hospitals. Planning needs to include financial targets necessary to obtain or maintain a specific rating from the rating agencies, bond issuers, and bond investors. Financial planning cant begin the year you want to build a new structure. It has to be done several years in advance.
The rating agencies are a key information source. The agencies encourage a dialogue with healthcare providers at the earliest stages of capital planning, providing valuable feedback that may be helpful during the various planning phases. Credit ratings are not determined simply by comparing institutional ratios to rating agency medians. Instead, weight is placed on core credit variables, looked at over time and in relation to healthcare trends. These variables include capital spending, the competitive environment, management performance, market factors, and the systems strategic plan. Credit medians are divided into a few broad segments, including hospital utilization, financial performance, balance sheet strengths/weaknesses, patient revenue mix and key ratios of the income statement and balance sheet.
While many larger systems have the expertise and the staff to do these kinds of analysis, many of the mid to small size hospitals do not. How can this problem be solved? There are several sources where information and expertise can be found. Network with your industry peers and involve your auditors. There are also healthcare specific financial advisors and investment bankers who can share whats working across the state or the country. Plus, theres always the potential of hiring of a few key individuals as consultants or to full time staff positions which, in our opinion, could be a wise investment. The key is to engage someone who has healthcare capital market experience. Boards of trustees have a fiduciary responsibility to allocate the appropriate resources to obtain the best financial results. This is as important as having a world class medical staff.
