Magazine article The Journal of Lending & Credit Risk Management

Give and Take: Reimbursement (and Other) Changes in the Healthcare Industry

Magazine article The Journal of Lending & Credit Risk Management

Give and Take: Reimbursement (and Other) Changes in the Healthcare Industry

Article excerpt

Changing reimbursement policies from Medicare/Medicaid, insurance companies, HMOs, and others are just part of a challenging environment for banks making healthcare credit decisions. RMA interviewed two senior lenders to learn how they handle those changes in the healthcare marketplace that could affect loan quality. Both lenders focus on the quality of management as a key criterion for successful lending. Depending on the portfolio and information available, greater emphasis is placed alternately on historical cash flow analysis and thorough review of projections. Both processes are used to determine whether borrower management has demonstrated an ability in the past to handle significant, often unpredictable swings in revenue and whether it can do so in the future. J. Phillip Norman, SVP, Frost National Bank, San Antonio, Texas, manages the bank's healthcare industry portfolio and segments of general corporate banking for the San Antonio metropolitan area. Joseph T. Resor III, SVP and managing director, KeyBank, Cleveland, Ohio, manages the healthcare industry portfolio for all of KeyBank, overseeing the group's five offices in Cleveland, Boston, New York, Cincinnati, and Seattle.

RMA: What types of information do you find best enables your lenders to determine the impact of changes in Medicare/Medicaid reimbursements on your customers?

JPN: Frost gathers information in a number of ways. To begin with, the Medical Impact Study, provided by the San Antonio Chamber of Commerce, outlines the total economic impact of the healthcare industry on San Antonio's economy. In 1998, $7.4 billion was spent on healthcare and 100,000 people (15% of the workforce) were employed in the field. This information provides a framework within which to understand the market.

We also rely on the expertise of our lenders. Frost's medical practices lending is the largest segment of our healthcare portfolio, which is handled through our corporate bank. The calling officers handling this portfolio have an average of 15 years of experience. We find that the information they gather through regular, face-to-face calling on group administrators and lead doctors is crucial. Our officers hold ongoing discussions with local CPAs and attorneys, which is particularly important in understanding managed care contracts.

In terms of reviewing financial information, our strong customer relationships help us obtain great detail through information outside the standard balance sheet and income statement. Most of our customers' statements are on a cash basis, so we look for a breakdown of total gross revenues, including adjustments. We also request accounts receivables aging reports, since they often don't appear on the financials. These typically are broken down by payor, and understanding that mix is critical.

JTR: Verbal conversations with borrowers is key. Many of our customers are in the long-term care side of the healthcare market, and this area has become a focal point for KeyBank. We require projections showing different reimbursement scenarios, which we review and then use to challenge management's assumptions. We don't require our lenders to become experts on the peculiarities of reimbursements. Changes in Medicare reimbursements have had a negative impact on cash flow in the long-term care market. However, the impact has been negative to neutral for our hospitals and neutral or even positive for our physician practices. KeyBank has a long-term view of the healthcare market and for that reason we don't become overly concerned about changes in reimbursement.

Our customers tend to be relatively large providers, so the financial statements are accrual-based standard accounting, as opposed to fund accounting. Therefore, we do a full traditional analysis. Other types of information we use include accounts receivable agings, which are especially critical for the analysis of hospitals and physician practices. …

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