This article appears in the October 2012 issue of HealthLeaders magazine.
Addressing a litany of government mandates while dealing with a sluggish economy and decreasing patient volumes and reimbursements have created a challenge for CFOs looking to raise large amounts of capital. Only a handful of organizations have the wherewithal to generate enough cash from existing operations, reserves, or endowments, leaving most to weigh the options. Small and large hospitals and health systems are turning to mergers to find financial strength. However there are other opportunities, including joint ventures, venture capital, bank loans, and blends of these that can provide the critical dollars needed to stay competitive.
As value-based care and bundled payment systems take root, the demand for often expensive organizational competencies, such as IT, can put slow or underperforming hospitals at risk for faltering long-term. It's the precarious financial situation that some providers are now in that is limiting access to badly needed capital and that has sparked a jump in healthcare mergers in the past two years. But that avenue is not attractive for many organizations, and so they are looking at new ways to deal.
"Actually there's nothing new or different in capital financing that has occurred for at least 10 years, but now there are lots of shades of gray in how deals are created," says Robert Shapiro, senior vice president and CFO at North Shore-Long Island Jewish Health System in Great Neck, N.Y. In April the system, which has approximately $1.3 billion in long-term debt, issued about $50 million in tax-exempt fixed-rate debt to save money by taking advantage of low interest rates. With a $6.7 billion annual operating budget and 16 hospitals in the system, North Shore-LIJ has consistently used what Shapiro describes as a traditional capital allocation model, with cash generated from operations, fundraising, and borrowing; but that's changing.
"We've tried to take an approach our investors are comfortable with, and when you have access to the capital markets it's a pretty efficient way to access capital," he says. "However, we are looking at making acquisitions as we feel the need to expand into markets sooner than we may have before healthcare reform. Now we're starting to consider alternatives such as healthcare partners or joint venture dollars. We haven't done it yet, but we're likely to do so in the next year or two."
Until 2009, debt financing—or raising money for working capital or capital expenditures through the sale of bonds, bills, or notes—was considered an easy process, but those days have passed. Now, finding the scale and financial resources to secure a top-notch public credit rating can prove challenging, especially for hospitals with finances hit hard by the recession and in dire need of facility or infrastructure upgrades. A hospital's inability to secure a BBB- or better credit rating can stymie access to capital.
For the organizations that fall below that rating, mergers can be a good pathway to get access to capital for infrastructure upgrades or technology updates. Buyers tend to look beyond the credit rating and balance sheet and at the hospital's leadership, market position, and long-term viability.