Demogrphics And World Commerce

Health Care Financial Accounting

Mark Galvin

December 3, 2003

Alternatives for Improved Access to Capital

This is a critical time for hospitals and health care providers. Until the early 1970s, hospitals operated in an environment that encouraged the construction and expansion of hospital facilities and services. More recently, prospective fee schedules and capitated payments have put cost containment pressures on hospitals which have reduced utilization of inpatient services and facilities and resulted in substantial excess capacity. In addition, proposed reductions in government reimbursement programs have affected the financial viability of many hospitals throughout the nation.

The federal government's capital contributions to hospital construction have been the impact of the federal health care financing programs such as Medicare and Medicaid. Prior to the implementation of Medicare and Medicaid in 1965, the federal government financed about 15 percent of hospital spending. Today, with federal financing of care for the elderly and disabled, total government spending accounts for more than 50 percent of community hospitals' net revenues, with Medicare alone accounting for 36 percent of such revenues. As the largest source of income for most hospitals, Medicare has had a profound effect on hospital organization and financial viability.

Initially, Medicare and Medicaid paid hospitals based on costs, giving hospitals an incentive to spend more, rather than less. Indeed, this encouraged hospitals to expand services and invest in capital resources, particularly because Medicare and Medicaid increased hospital utilization by expanding access for the poor and the elderly. Also, because insurance insulated most patients from health care prices, hospitals competed on the basis of services, amenities, and quality. This competition further fueled investment in hospital facilities and equipment. Nevertheless, in order for hospitals to be attractive to institutional investors, every not-for-profit hospital needs to sell itself as a creditworthy organization by demonstrating its management strength and depth, strategic vision and focus, market position and operating environment, and committed approach to investor relations.

According to The Health Care Financial Forum, a group of health care professionals who came together to promote the development of innovative and creative solutions to access capital and to respond to the continuing challenges of assessing the value, creditworthiness, and financial performance of healthcare providers and payers, five specific actions need to be taken to prepare for good financial future and for hospitals to become attractive to potential investors.

Concentrate on operating income by shifting their focus from investment income to operations. Improve liquidity by recognizing the importance of balance-sheet liquidity to institutional investors. Develop effective financial leadership which includes optimizing financial performance by achieving performance improvement, maximizing return on investments, minimizing the cost of debt financing within acceptable risk parameters, and building consensus. Fostering investor relations is also a key aspect in the attempt to achieve financial success.

Managing both sides of the balance sheet can also be helpful for a hospitals financial future. Hospitals should not only focus on the asset side of their portfolio, but also on the structure of their liabilities and the relationship between the two. Hospitals should explore guaranteed investment contracts that have a high guaranteed yield and full flexibility and carry no market valuation risk. Principal and interest funds forward-delivery agreements or "collateralized" investment agreements that earn a high long-term yield on traditionally