Academic journal article Frontiers of Health Services Management

Access to Capital-A Growing Concern/Response from the Feature Author

Academic journal article Frontiers of Health Services Management

Access to Capital-A Growing Concern/Response from the Feature Author

Article excerpt

SUMMARY * Access to capital over the next ten years will be one of the biggest challenges healthcare organizations will face as they strive to remain competitive and serve their communities. Meeting the growing needs for capital will require a disciplined and honest assessment of the capital sources that will be available and the best ways of positioning an organization to maximize their uses. It is incumbent on chief executive officers and other senior leaders to create a disciplined process for allocating capital and conveying how that process will be linked to the organization's strategic plan. All of the credit constituencies "buying" healthcare need to fully understand how the organization is positioning itself for future growth and success, and detailed bond marketing plans need to be implemented well before the actual sale of a new bond issue. Large and small healthcare providers will have sufficient access to capital in the future if investors believe that senior hospital executives have a credible plan and are disciplined enough to execute it.

As THE NOT-FOR-PROFIT healthcare industry enters a new era of expanding services and facilities to meet the needs of the aging baby boom population, chief executive officers (CEOs) of healthcare organizations are moving access to capital to the top of their to-do lists. However, at the same time that their organizations' capital needs are mushrooming, CEOs are confronting severe challenges to their capitalraising activities: spiraling increases in healthcare costs; rapidly increasing numbers of uninsured and underinsured patients; threats to not-for-profit, taxexempt status from state and local law enforcement officials and activists; and growing economic pressures to reverse burgeoning national and local budget deficits.

Investors in tax-exempt healthcare bonds and other credit constituencies, like healthcare consumers themselves, have become much more sophisticated in the past few years. Before they will agree to make long-term capital commitments in an increasingly volatile healthcare environment, these constituencies expect CEOs and top Healthcare managers to have concise and credible strategic and capital plans. The ability of healthcare CEOs to articulate and execute those plans will ultimately determine which hospitals will have sufficient access to capital.

In 2002, I contributed to a white paper for the Healthcare Finance Forum titled The Future of Not-for-Profit Healthcare Capital Financing. In almost every case, the trends identified in that paper have remained consistent over the past two years.

* The credit environment will be positive in the short term but cautious going forward.

* The investment climate for not-for-profit hospitals will be challenging, but open to organizations exhibiting solid financial performance.

* Not-for-profit hospitals will be exploring creative financing structures to increase debt capacity and offset retrenchment by bond insurers and letter-of-credit banks.

* Not-for-profit hospitals that are successful in the capital markets will be financially strong, continue to improve operations, and focus on investors' needs (HFF 2002).

This article is a supplement to the prior report and outlines and discusses some of the key environmental factors influencing access to capital that CEOs, senior executives, and board members should understand. It also identifies the credit constituencies that affect the access and cost of capital, describes the ways in which capital market participants view the healthcare industry, and presents practical strategies for CEOs to interact with capital market constituencies so that they can obtain the strategic capital they need to remain competitive and serve their communities.

THE CURRENT HEALTHCARE ENVIRONMENT

Since 2000, the operating environment for most healthcare organizations has improved significantly, allowing many healthcare providers to recover from the almost disastrous effects of the 1997 Balanced Budget Act as well as many failed integration strategies. …

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