Mark E. Grube
Therese L. Wareham

Do you want to know the most essential elements of your organization's strategy? Listen to what the rating agencies, bond insurers, and investors are saying.

At A Glance 

Healthcare organizations are most attractive to the capital markets if they demonstrate or make use of: 

  • High-level strategic thinking and integrated strategic and financial planning 
  • Comprehensive dataon market and strategic position 
  • A measurable, measured, and achieved strategy 
  • Market strength and competitive differentiation 
  • An ongoing planning process 
  • Frequent communication and well-considered documentation 

Strategy is critical to our current rating assessments because it encompasses all of the fundamental credit factors used in our analysis of not-for-profit healthcare entities-governance, medical staff, services and service area, competition, financial resources, and legal structure. These six factors have not changed over time and remain the foundation for our credit analysis.

A Rating Agency Analyst: The expected or hoped-for financial benefits of strategy are greatly discounted without a link to financial projections. If an organization is lacking financial projections, we will not provide bond insurance.

A Bond Insurer: The strategic plans of many hospitals indicate wanting to be everything to everybody, but the question is, Are the strategic plans realistic from a financial point of view? In evaluating an organization's market and strategic position, we're looking for financial sustainability.

An Investor: Sound strategic planning is essential to effective organizational and financial performance.

All healthcare executives today are likely to agree with this statement, and also to recognize the need to link strategic planning with financial planning. Yet these views represent a significant leap forward from a time when strategic planning in health care typically produced little more than a large document destined to gather dust on the shelf. Often pursued in a financial vacuum, healthcare strategic planning in years past tended to result in wish lists that could not be implemented or plans that were implemented without a sustainable financial foundation.

Today, healthcare financial leaders, board members, and other executives recognize the importance of using best practice, integrated strategic financial planning to effectively balance organizational strategies with financial capabilities. They know that this balance can significantly improve access to the capital needed to fund strategic initiatives. They still must answer a challenging fundamental question, however: What are the most essential elements of strategy upon which the integrated strategic financial planning process should focus?

A good way to answer this question is to ask the capital market players, namely the rating agencies, bond insurers, and investors in health care. In assessing comparative investment opportunities and organizational ability to repay debt, capital market players use extensive due diligence to evaluate hospitals' and health systems' strategies and financial performance. Understanding what they want to know about a healthcare organization, therefore, can provide an invaluable perspective.

To this end, we interviewed leading analysts in the agencies that rate healthcare credits, in the insurers that offer healthcare bond insurance, and in an institutional investor that purchases healthcare debt. These individuals pointed to six strategic concepts that make a critical difference to the decisions made by the capital markets. Healthcare executives who understand and embrace these six "essentials" can be confident about well-focused strategic and financial planning efforts.

Essential 1. High-Level Strategic Thinking and Integrated Strategic and Financial Planning

The process an organization uses to devise its strategic plan and link it to its financial plan is critically important. "We look first for real evidence of strategic thought . . . evidence that the organization's leaders are thinking globally about their business and about the forces that could impact the organization at multiple levels," comments Martin Arrick of Standard & Poor's. "The best organizations all have in common a well-developed, extensive planning process."

"People make fun of talking about process, but process has a huge influence on where you end up," Steve Renn of Ambac Financial Group, Inc., says. John Goetz of MFS Investment Management notes, "We avoid the extremes related to strategy-that is, organizations that either don't seem to have a strategy or whose strategy seems well beyond their means or pie-in-the-sky hopefulness."

The board and senior management is responsible for the development of strategy. "A formal, structured planning process that is supported by the board, CEO, and senior executives is critical," Renn says. "The process should benefit from multiple inputs from people and of resources."

Also, more than one person should be able to articulate the strategy. Rating agencies and insurers, which typically have more access to management than investors, expect board members, senior executives, and key physician leaders to be able to describe the organization's strategy in depth.
Capital market analysis of an organization's strategic planning process frequently focuses on seven key elements of an integrated strategic and financial plan: mission and vision; objectives; initiatives; indicators and targets; action plans; accountabilities; and financial projections.

"Mission and vision set the tone for the organization, so they have to be more than slogans on the wall," says Fred Martucci of Fitch Ratings. "They must be translated into market presence and overall organizational performance through objectives and initiatives."

Rebecca Kuhar comments, "Vision falls flat on its face without tangible initiatives incorporating measurable goals to support the organization's vision. These goals typically include financial targets as well as measurable utilization and market share targets." Eva Thein of MBIA adds, "Concrete initiatives with financial targets and time frames establish the accountability between vision and the actual results."

Multiyear planning-most commonly cited as five-year planning-and financial projections are strongly preferred by the rating agencies and bond insurers. For many capital players, the absence of such financial projections that prove affordability completely discredits an organization's strategy. "If a hospital does not prepare a multiyear capital plan or projections, it would be difficult, if not impossible, for us to insure its bond," comments James Andrews of FSA. Goetz says, "The absence of a financial forecast does not preclude our investment in an organization's bonds, but it's a real plus when an organization links strategy to projections because it shows that they are using a disciplined process to set priorities and make tough decisions about required profit margins, capital expenditures, debt levels, and other financial issues. Generally, linked strategic-financial planning is a predictor or indicator of success."

Projections must be based on assumptions that are plausible and defensible. "We're looking for objective, detailed, and well-supported assumptions that have been devised using independent, external data sources," notes Renn. "Good assumptions are conservative assumptions (we can smell a lack of conservatism 100 yards away), and we like to see organizations using modeling and simulation to identify worst-case and best-case scenarios and stress-test their assumptions."

"Assumptions must be in line with past actual performance, and should not be unrealistically optimistic unless there's a very solid reason behind the optimism," observes Beth Wexler of Moody's Investors Service. "Long-term durability achieved through solid financial performance provides evidence that the organization's strategies were correct ones. Past performance is the best predictor of future performance. An organization's historical financial track record provides credibility (or not) for future projections."

To achieve best practice, integrated strategic financial planning, an organization's strategic plan must reflect financial capability, and the financial plan must quantify the profitability and liquidity requirements of the organization's strategic objectives. Capital market players require extensive financial data regarding forthcoming plans and the achievement of or shortfall from past plans. "Need-to-know" elements of financial plans that enable the capital market players to assess the success, or lack thereof, of organizational strategies include financial projections, financial goals, capital expenditure requirements, debt capacity and cash requirements, capital position, and profitability targets.

Essential 2. Comprehensive Data on Market and Strategic Position

Capital market players require in-depth and regularly updated information on an organization's market and strategic position. Like the financial data mentioned earlier, such data are not "nice-to-know," but "need-to-know" information. The players thoroughly analyze the data to assess whether the organization understands its marketplace challenges and opportunities and can identify financially viable competitive strategies that will ensure its success. The results of this analysis can be material to bond rating, insurance, and lending decisions.

The analysis of market and strategic position conducted by capital market players is organization-specific and multivariate. Numbers in isolation may not be critical, but the combination of data provides the needed big picture about an organization's performance in its competitive environment. "It's hard to say what data elements are most important-it depends on the institutions and how they fit into their markets," notes Ellen Gordon of FGIC.

Arrick observes that the assessment process is cumulative: "Trends, which show track record and momentum, are important in addition to annual numbers."

Many capital market players are sophisticated researchers. They routinely verify and look beyond the information provided by an individual hospital to obtain a complete picture of the organization's competitive environment. Thein provides the following example: "We consult numerous databases to obtain financial and strategic information on our credits' competitors. If a hospital's competitor has similar strategic directions and more financial resources, we take this into account in our decision-making process."

The implication for healthcare leaders is this: In developing and updating strategic and financial plans, leaders must clearly articulate the organization's market and strategic position and the competitive trends likely to impact the organization. Data to support any observations and conclusions must be readily available.

Essential 3. Market Strength and Competitive Differentiation

The capital markets look for organizations that represent "better-than-average" performers in their marketplaces. Decisions about bond ratings, insurability, and bond purchase can depend on the organization's market share, leverage with payers, strength of physician staff, and/or other factors that indicate the organization's competitive strength. An organization that does not maintain a strong position and/or is not clearly differentiated from its competitors should ensure that its integrated strategic and financial plan outlines a path to get there in the future.

Competitive differentiation can center on one or any number of factors, including:

  • Market(s) targeted for the organization's services
  • Types of services offered
  • Physician and staff loyalty, satisfaction, and competence
  • Technological innovation
  • Service cost and efficiency

"Market differentiation is important," says Gordon. The important questions she asks include, "Is the hospital's strategy to capture a greater portion of its local market or does it seek to draw from a wider geographic area? Is the hospital pursuing certain, selected services or a broad range of services? How does this strategy compare with the strategy pursued by competitors? What are the competitive benefits of each approach?"

Unless the hospital is an absolutely essential provider in its region, declining demographics represent a red flag because long-term sustainability may be questionable. Essentiality and survivability are critical. Thein comments, "We don't want to be insuring the third player in a market or perhaps not even the second player unless there is absolute certainty that these players will be survivors in the long term. Weak market share pretty well precludes insurability."

"Market share correlates well with durability and essentiality in the market," notes Renn. "We prefer the provider to be dominant-not by a little, but by a lot-and we strongly prefer to see service area population growth rates that exceed the U.S. average."

According to Goetz, organizations don't need market share dominance to be of interest to institutional investors. "But they do need to be sizable and have a critical mass that ensures sustainability over the long run," he comments.

Accordingly, hospital and health system strategies should be directed at achieving market strength and/or a differentiated competitive position. Hospitals that offer services that somehow cannot be duplicated by other providers in the region have a distinct competitive advantage.

Essential 4. A Measurable, Measured, and Achieved Strategy 

The development of strategy is only half the battle. The strategy must be properly implemented, monitored, and achieved. Successful healthcare organizations define indicators of the success of strategies, measure performance against these indicators, and devise and implement plans to respond to less-than-anticipated performance. Renn describes this process using the SMART acronym: "During our due diligence process, we try to analyze or verify whether the organization has achieved specific, measurable, attainable, relevant, and time-bound strategic goals."

"If an organization misses a target, we ask leaders why and what they did or are going to do about it," Arrick comments. "Good organizations have ready answers to these questions. They are willing to provide us with detailed targets against which we can measure them."

Strategy must be properly executed and achieve the expected results. "The success or challenges an organization experiences in achieving its strategy will be borne out in its financial performance and reflected in its balance sheet, and income and cash flow statements," comments Lisa Goldstein of Moody's Investors Service.

Gordon observes, "We've seen the articulation of vision and goals that doesn't always translate into financial strength, so we try to evaluate the reasonableness of the assumptions and projected financial performance. For example, if a hospital is expecting to increase volume, and therefore revenue, we'll look to see where the increased utilization is coming from. Is it from population growth, service expansion, or market share shift from another hospital? Then we assess whether the financial projections are reasonable when we link the data together."

"We're trying to assess an organization's ability to repay debt service," comments Arrick. "Although strategic position does not repay debt service, at some point, an organization has to be able to translate a good strategic/market position into cash flow, margin, or other financial indicators." He notes that how organizations pay for the capital plan to support selected strategies often presents the rub: "We're very concerned about whether healthcare leaders have adequately focused on their long-term financial position because we often see organizations having to dip into their balance sheet, through use of unrestricted reserves or unplanned debt, due to unrealistic assumptions."

Bond insurers, rating agencies, and investors commonly ask healthcare organizations for the strategic plans from several years past to evaluate whether the organization has been successful in meeting the financial targets. Kuhar elaborates, "Comparing budgeted to actual numbers is also an important piece of the analysis, but it can be tricky because most organizations revise their budget during the year. We thus specifically ask for the hospital's original budget for past years. We gain comfort when actual financial performance exceeds budgeted performance each year."

Essential 5. An Ongoing Planning Process 

Healthcare organizations should conduct integrated strategic financial planning on an ongoing basis and update their plans as part of this process. Major strategies might not change from year to year-and preferably do not, if they are good ones to begin with-but actionable initiatives to achieve those strategies should be revisited annually. "We see organizations with poor market position jump from doing one thing to another, making major changes to their strategic direction," observes Andrews. "This is of concern. By contrast, strong organizations that do strategy well can and do review with us their strategy of four or five years ago. They tell us, 'Here's where we are and here's where we still need to go.' Strategy should be global; updates to the plan should be annual, if not ongoing."

Healthcare organizations should be treating their strategic business plan as a living document that needs to be checked regularly for progress, and then revised, as appropriate. "Doing this a couple of times a year may be a bit more than we expect," Renn suggests. "But as situations and assumptions change, the plan should be revisited. We want organizations to be looking afresh at their strategic plan at least each year and challenging and strengthening the assumptions."

Essential 6. Carefully Considered Documentation 

The strategic plan provides evidence of the strategic planning process. Like any written document, its objective is to communicate. The capital markets value concise documentation of strategy, but documentation must provide enough detail to communicate and enable evaluation of the strategy's viability. "We don't necessarily need the 500-page strategic plan, but instead, a more high-level summary document that will describe the strategy and what it encompasses," says Goldstein.

The level of detail must be appropriate to the organization, provide the needed statistics, forecasts, and financial expectations, and must back up in writing what the CEO and others have articulated verbally. "We basically want to see what the board sees," says Martucci. Andrews notes, "If we ask for more detail about market position, such as market share data by service line or utilization and competitive information, and it takes the organization two weeks to provide the information, this often signals a problem-critical market information probably is not part of their planning and forecasting process."

High-quality documentation and communication require leadership attention. Wexler comments, "We value organizations that are transparent about the opportunities and challenges that lay in front of them and that consistently communicate to us the good, bad, and ugly. When things start going off of plan, we look for more updating. Most organizations do a good job of calling us, e-mailing, or meeting with us when there's been a downturn in performance."

Quarterly updates to the plan are preferred by many capital market players even though bond documents usually require only annual updates and quarterly financials. "More frequent disclosure reduces the possibility of surprises, which are decidedly unwelcome," comments Kuhar.

Martucci observes, "Healthcare organizations in the bond market are essentially like a public company. Rating agencies should not have to be surprised by critical information. Healthcare leaders should pick up the telephone to communicate material changes and significant events. No nagging should be required."

The Key to Capital Access 

Ensuring access to the capital needed to fund strategic initiatives is one of the most pressing challenges many healthcare organizations face this decade. Without the capital required to pursue growth opportunities and replace aging facilities, most hospitals and health systems would be hard-pressed to maintain continuing competitive presence.

Integrated strategic financial planning forces prioritization of initiatives, balances strategic investment with sound financial management, and can thus significantly improve access to the capital markets. Healthcare financial leaders should be thoroughly involved with the organization's current strategy and plans for the future and maintain focus on the foregoing six elements of strategy considered essential by the capital markets. Attention to these six essentials of strategy will enable healthcare leaders to maintain and improve their organizations' strategic competitive performance and capital access.

Mark E. Grube is a partner, Kaufman, Hall & Associates, Inc., Northfield, Ill. ( 

Therese L. Wareham is a partner, Kaufman, Hall & Associates, Inc., Northfield, Ill. (

Publication Date: Tuesday, November 01, 2005

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