Economic Climate Changes Banks' Relationships With Hospitals

The difficult financial climate has not only hurt hospitals' ability to borrow, but it's also caused health systems to rethink their banking relationships and forced them to deal with new banking partners.

The partnership between hospital chief financial officers and bankers historically has been cordial and built on trust, but as capital funds have dried up and the financial sector has seen much upheaval, hospital CFOs are facing a situation with fewer available dollars and new bankers and institutions.

Mike Rowe is senior vice president of finance and CFO of Sisters of Charity of Leavenworth Health System, a Lenexa, KS-based system with nine facilities in four states, with 2,054 staffed beds. He notes that the hospital banking community is much smaller than a year ago. Many bankers who built strong relationships with health systems are no longer in the business, which has caused hospitals to forge ahead with new people and banks.

One example of the changing dynamic is at Crouse Hospital, a 439-staffed bed facility in Syracuse, NY. Kimberly Boynton, CFO, says her hospital uses a regional banking institution that has cut back on the hospital's credit line.

"When things are good, the relationship just kind of coasts along and you don't have the kind of scrutiny that goes on now," says Boynton.

Investment banker Jeffrey Cohen, managing director at Jefferies & Company, Inc., in Albany, NY, says commercial banks are asking his hospital clients to reevaluate their capital structure.

"Hospitals have to wait it out. The hospital industry—like other industries—got spoiled when credit was so cheap and credit was so easy to come by," he says.

So how are hospitals handling the situation? Here are three ways they are surviving the current capital crisis.

Rethinking banking
Banks are looking across all of their letters of credit with hospitals and shrinking lines of credit. Hospitals, in turn, are looking at how to cut costs and whether to move their business to other banks.

The result is that banks are now offering broader relationships with hospitals.

"They are looking for an opportunity such as your primary cash management functions, to do lockbox services, to do patient receivables financing. They don't just want to write you a loan," says Rowe.

Diversifying
Hospitals have responded to the changes by looking to other banks.

"We are broadening our relationships with banks in general, simply because one of the big lessons you learned from this economic recession is you can't afford having too much of a dependency on one bank or one banking institution or one vender to provide you with everything you are going to need—no matter how strong you are," says Rowe.

Moving to new banks comes with positives and negatives. Community and regional banks could provide more face-to-face interaction but smaller credit lines. And each institution has different requirements. So the more banks a hospital deals with, the more reporting and analysis a CFO will need to submit to satisfy each bank's requirements.

"When you start to do things like that and you start answering to three institutions rather than one, that makes a big difference and takes a lot more time," says Boynton.

Rowe thinks the move to diversification will continue even after the capital climate improves. "This is probably a permanent change. You are not going to see hospitals maintaining a one-on-one banking relationship," he says.

Getting creative
Boynton says hospitals are looking at different ways to have access to capital. One idea is rather than having bank letters of credit for self-insured programs, such as workers' compensation or medical malpractice, hospitals are finding insurance bonds that allow them to go through the insurance vehicle, which can be a more favorable option now.

"You have to go out and look at these kinds of alternatives," she says.

With this greater scrutiny has also come greater inquiry.

The reason is twofold: Banks are more interested in how healthcare institutions are dealing with the capital crisis, and they have refocused efforts to review rather than sell.

"They are not selling as many new products, so I think there is more of an opportunity to really look at what they have already sold," says Boynton.

Though many hospital CFOs have gotten more proactive and diversified in dealing with banks, there are still questions as to whether CFOs will continue that approach as the capital climate improves. Boynton wonders if CFOs will go back to simply searching for the lowest rates again once business returns to normal.

"Ultimately, the hospital's job, the CFO's job, is to save money for the institution, and that's when reducing the risk and saving the money is most important," says Boynton.