In the midst of credit market turmoil, underlying credit ratings for hospitals have become more important than ever. What can a typical hospital do to improve its ratings, besides the obvious answer of improving operating margins, building cash, and reducing debt? That’s the focus of an article by Scott Clay and Deborah Kolb-Collier, senior principals at Noblis Center for Health Innovation, and Peter Bruton, managing director at RBC Capital Markets, in Strategic Financial Planning, one of HFMA’s newest publications.
Some externally oriented factors are simply beyond a hospital’s control. Short of a merger or a major relocation, there is little you can do to change such factors as a competitive market with a declining population. Other factors are within a hospital’s control, but usually result from long-term, focused efforts. These outcome-oriented factors include many of the key financial ratios that are most heavily weighted in rating actions. They are typically the culmination, however, of a series of other actions.
In the short term, there are several process-oriented or activity-oriented factors that can add up over time to produce changes in outcome-oriented factors and improve ratings. These activities behind the ratios are the focus of this feature.
Strategic & Financial Planning
Ongoing, integrated planning that aligns strategic goals with financial capability is essential to make the most effective use of capital investments and instill discipline for cash management.
At Medstar Health, which received upgrades from two major rating agencies this year, system executives maintain their focus with a balanced scorecard that matches up with key ratings factors. Hallmark Health, which has received four upgrades in three years, constantly repeats the mantra of reaching a “one-to-one cash-to-debt ratio.” This goal is the standard against which all strategic plans and capital requests are measured.
Another essential factor in a hospital’s strategic planning is a focus on comprehensive physician development and alignment as the engine to drive growth. There are many possible approaches to physician alignment. HFMA’s Physician Alignment Forum provides specific tools to assess different models of engagement, align incentives, and navigate regulatory rules.
Board Development
Strong board development includes recruiting top-notch talent, refining the organization’s governance structure and process, and educating board members. Board members must understand how actions taken today fit within the organization’s long-term strategy to improve its ratings. They must also understand what factors are within and outside the organization’s control and how these considerations might temper expectations for rating upgrades.
One particularly effective strategy for educating board members on credit ratings management is to involve the board in preparing for rating agency presentations. Hallmark Health brings board members to New York to meet with the rating agencies. According to CFO Jim Nania, this strategy helps bring the hospital’s efforts into focus for the board.
Managing Agency Relationships
Telling your hospital’s story is central to the process of managing relationships with rating agencies. This requires communicating a clear and consistent vision for how all the moving parts in your organization are working together to achieve desired results. Medstar Health’s CFO Mike Curran states that Medstar has progressively built its story, adding chapters as it reaches goals from previous years and sets new ones.
Strong agency relationships are also based upon credibility—walking the walk after you have talked the talk. A long-term track record of meeting or exceeding expectations is one of the most important rating factors beyond financial ratios.
Finally, remember that the key to your agency relationship is “no surprises.” Disclose statistical and financial reports on a monthly or quarterly basis. Meet with your credit analysts at least once a year and keep in touch remotely on an ongoing basis. And if a major event occurs, make sure that the agency hears about it from your management rather than from a news story.
A recent conversation with HFMA leaders on the credit market turmoil underscores the importance of your hospital’s credit rating. If quantitative measures are between two rating categories, the qualitative management factors outlined in this feature can definitely make a difference. And if pursued over the long-term, these factors can help achieve the key financial ratios upon which an upgrade depends.
Visit HFMA's web site for more answers to pressing healthcare business questions.
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If you have questions or comments about HFMA Wants You to Know, contact editor Robert Fromberg at rfromberg@hfma.org.