Spurred by the economic crisis, many providers are reevaluating their capital spending plans. Baylor Health Care System has a longstanding tradition of focusing on the investment side of the balance sheet, but during the past year, the health system has focused on the liability side. The system has implemented policies and procedures as well as a global capital strategy aimed at bringing to the debt side of the balance sheet a level of rigor and discipline similar to investment portfolio monitoring. Baylor's CFO, Frederick Savelsbergh, discusses the health system's strategy.
hfm: The economy has had a significant impact on many hospitals' ability to access capital. What is your organization's capital financing strategy in the current economy?
Savelsbergh: Baylor, like most large healthcare systems, has operated with a structured investment management program that has clearly established risk management parameters and asset allocation guidelines, and has tracked its performance regularly. During the past year, the healthcare system has focused on a compatible framework on the liability side of the balance sheet. We've just concluded our analysis of our entire debt structure, which we refer to internally as our global capital strategy. Coupled with that strategy, we also created an integrated debt-and-swap policy, which has a strategic and a risk management focus rather than a transactional basis to it.
Our global capital strategy consists of six areas of focus. The first area is to continue emphasis on maintaining a strong credit rating. Baylor Health Care System is currently rated AA2 stable by Moody's Investors Service and AA-minus stable by Standard & Poor's. So we have a focus to maintain our bond rating. Our second area of focus is to restructure our fixed-income portfolio to provide more liquidity. The third is to maintain and enhance unused bank lines of credit. The fourth area is to cultivate access to a broader group of commercial banks. The fifth is to analyze the impact of lease exposure due to anticipated changes in accounting treatment for operating leases. And the sixth area of focus is to seek a longer maturity profile of our long-term debt.
hfm: What are the challenges to the successful implementation of the strategy?
Savelsbergh: Obviously, dealing with the continued economic uncertainties, whether they're at a state level or a national level, is one challenge. Another is that we are in a growth market-the Dallas-Fort Worth Metroplex. The area adds population equal to a city the size of Atlanta about every six years, so there are opportunities in this market with continued growth of population. We have to be there to meet the needs of the communities we want to serve. So obviously there are capital demands there. In addition, we run multiple business models. We're a not-for-profit healthcare system, but we also have a lot of joint venture entities within the system that consolidate into our organization. As a result, we have some highly leveraged joint ventures that create balance sheet pressures.
hfm: Have you found ways to overcome these challenges?
Savelsbergh: First, we have integrated our budget in our cost control, in our monitoring of performance processes, into a streamlined type of reporting. So we monitor on a weekly basis, a biweekly basis, and a monthly basis. We focus on the balance sheet as well as on operating indicators, particularly on days cash on hand, cash flows into the organization, and all those revenue cycle metrics that typical large healthcare systems evaluate.
We are evaluating our strategic investment in capital, making sure that we have adequate returns and that we feel that the success of the projects is highly probable. And then we are focusing on a lower threshold of capital for approval. And based on that, we're able to approve capital for patient safety and high-quality care, and to be where we need to be strategically in the market.
hfm: Has your organization found that access to capital is improving?
Savelsbergh: Baylor Health Care System has always had access to capital, obviously based on the strength of its balance sheet and its financial performance, but even at the height of economic problems in this country back in February 2009, we were able to go into the bond market and do a debt issue. We were one of the first AA-bond-rated entities into the market in 2009. Although we were able to do that, we did incur a higher cost of capital. However, based on improved economic conditions and the continued strength of our balance sheet and our financial performance, we are able to attract a lower cost of capital now.
hfm: Has your organization had to alter its capital spending plans as a result of pressures in the economy and healthcare reform?
Savelsbergh: We have had a long tradition in this organization of hardwiring our strategic financial planning to our strategic financial plan and our ability to deliver results associated with what we plan and budget. But again, we have gone back and evaluated our projects. We continue to have projects in the pipeline now, and we look at the returns and the probability of success and continue to evaluate those projects.
We are moving forward. We have 21 major strategic projects right now. Of those, 13 are in process and under way. Another eight will be evaluated this fiscal year and will be put into production in terms of creating either the entity we're seeking to build or the improvement that we're looking for.
Publication Date: Friday, October 01, 2010