During the recent widespread changes to the healthcare industry, one transformation commonly overlooked is the shift in focus of creditors—how banks and government lending agencies assess creditworthiness.
Obtaining capital in today’s volatile credit markets is not impossible—far from it. It’s imperative, however, to be thoroughly prepared before seeking funding. You should be cognizant of the current state of healthcare, particularly in your hospital’s market area, and be ready for increased levels of inquiry.
The standard credit metrics (operating profitability, strength of the market, competition, etc.) are as important as ever; however, what new questions or areas of emphasis should you expect when approaching the debt market today?
Balance sheet scrutiny
Given the high levels of uncertainty regarding the future picture of the hospital industry, expect higher levels of scrutiny on your balance sheet. All three credit rating agencies have predicted narrowing operating margins as the transition to a value-based reimbursement system will be highly disruptive. Creditors now are hoping to see higher cash balances to offset potential or actual declines in operating margins that can be used to weather potential storms down the road.
Partnership options
If you are not already part of a system, be prepared to discuss potential partners in your market. The rollout of the Affordable Care Act has spurred hospital mergers and acquisitions (M&A) as hospitals seek to gain economies of scale, increase negotiating leverage and diversify geographically to remain profitable in the face of reimbursement cutbacks mandated by the new law. The high level of M&A activity in the market is expected to continue, so creditors want to be assured there is a natural partner in your market your hospital could affiliate or merge with should the need arise.
CAH status
Critical access hospitals (CAHs) should be prepared to discuss how their CAH status was obtained and the distance to the closest hospital. About two thirds of the existing CAHs do not meet the original qualifying metrics due to a loophole that allowed state governors to designate nonqualified hospitals as CAHs during the program’s first 10 years of existence. Given the fiscal pressures facing the federal government, and Medicare specifically, reassessing the status of all CAHs is something that has been proposed to reduce their current number. While unlikely to happen at this time, CAHs who have more than 25 beds or are within 10 miles of the nearest hospital should be prepared to discuss with creditors the possibility of surviving without the CAH exemption. Another proposal that has been contemplated is reducing the 101 percent cost-based Medicare reimbursement currently collected by CAHs. To offset this risk, hospitals should run stress tests detailing how various cuts to Medicare reimbursement may impact the bottom line.
Physician recruitment
Given the aging baby boomer base of physicians, the growing trend of physicians being employed by hospitals and projected shortfalls in physician supply in the future, the focus on a hospital’s ability to recruit and retain physicians will increase. This can be an especially difficult challenge for rural hospitals. Therefore, be prepared to discuss the current status of your physician base (tenure and age of the highest producers) with banks and other lenders. You should also be able to discuss a specific physician recruitment plan and be able to relate physician recruitment success stories.
Differentiating characteristics
When working with government agencies, such as HUD/FHA and USDA, look for ways to differentiate your project. Possible ways to make your project stand out from the rest include combining public and private financing vehicles or targeting underserved communities. One of the White House’s stated initiatives for 2014 is to focus on mental and behavioral health. Government officials could prioritize your project if you are able to demonstrate a focus on these areas. As part of his initiative to address economic inequality, President Obama is designating communities across the county as “Promise Zones” with the goal of alleviating poverty by means of local-federal partnerships focused on creating jobs. If your hospital serves one of these zones or targets poverty-stricken areas in other ways, federal tax incentives or grants may be available in addition to agency direct or insured mortgage loans.
These new areas of focus are likely not a surprise to anyone and are items already being considered by most hospitals. However, being able to thoroughly address these potential questions upfront will allow for quicker execution and possibly better terms. In a rising interest rate environment where investors are already skittish regarding the hospital sector, a delay of only a few days in locking an interest rate can make a big difference.