Strategic Planning, Balance Sheet Management Are Core Competencies In Capital Process

July 14, 2004

 
Over the next five years, hospital chief financial officers (CFOs) say they plan to increase spending by 14 percent per year to purchase new medical equipment, upgrade technology, and increase capacity, even though the capital supply for most hospitals appears to be decreasing.

The latest Financing the Future report, Report 5: Core Competencies in Capital Planning, responds to that dilemma by focusing on the "how-tos" of capital planning and best practices in capital access among the nation's health systems. Financing the Future is led by HFMA in partnership with GE Healthcare Financial Services, with research conducted by HFMA and PricewaterhouseCoopers.

Interviews with more than 60 experts identified three competencies hospital financial leaders should master to stretch limited capital dollars and ensure maximized returns.

Competency One: Integrate the Strategic and Capital Plans

Capital planning starts with astute strategic planning. All too often in health care, however, strategic and capital planning processes are conducted separately, with detrimental results. To set financially sound strategic objectives, healthcare organizations must marry these key processes.

One organization to do so effectively is Orange Regional Medical Center in the Hudson Valley of New York. According to Chief Executive Officer Jeffrey Hirsch, "The real key to our success is clearly articulating our strategic goals and understanding the financial and operational implications of the investment required to achieve these goals."

The key steps in integrating strategic and capital planning are:

1. Analyze your internal position
2. Assess the external market
3. Identify and prioritize strategic opportunities
4. Allocate capital
5. Develop implementation plans and performance goals
6. Re-evaluate the plan on an ongoing basis

Competency Two: Manage the Balance Sheet

To access capital, you must control your facility's balance sheets by assessing capital needs, monitoring cash levels and debt capacity, and identifying alternative funding sources. Maintaining the balance sheet helps ensure that your organization is able to assume new debt when necessary for capital projects and has sufficient cash for other capital projects. Yet different capital projects and financial scenarios suggest different approaches to this balance. A well-managed balance sheet should: 

1. Support an organization's strategic plan within an appropriate credit context
2. Provide maximum flexibility given market expectations and legal considerations
3. Reflect the optimal capital framework given an organization's needs, capabilities, and risk profile
4. Provide the lowest overall cost for the risk of the asset and liability portfolios
5. Allow for future financing needs

Balance sheet management is a key component of planning and closely linked to strategic planning. The steps in this competency are:

1. Analyze your cash levels and debt capacity
2. Assess your capital needs
3. Match capital needs with capital sources
4. Consider alternative capital sources
5. Mitigate risks
6. Monitor the balance sheet on an ongoing basis

Competency Three: Select Appropriate Advisers

Capital access and planning have become extremely complex, especially with the number of financing tactics and derivatives available. Outside advisers can help manage this complex process, so it's important to know how to select the right adviser for the right function. In the simplest form, most debt deals require three different experts or advisers:  

1. A financial adviser, to structure the deal and represent a hospital's interest
2. A bond counsel, to develop the legal documentation
3. An investment bank or underwriter, to be the sales conduit between the hospital and the bond buyers

There are five general strategies for working with a variety of advisers: 

1. Pick good advisers with strong track records among rating agencies
2. Decide whether to use a trusted adviser or enter the competitive proposal process
3. Keep transactions simple
4. Keep internal and external experts connected, and make sure that the advisers you choose can work as a team
5. Make sure your board includes strong financial expertise 

SOURCE:

Financing the Future Report 5: Core Competencies in Capital Planning. HFMA members received a summary of the report in their July issue of hfm. Members can access the full report for free and non-members can purchase a copy from the Financing the Future web site.

Additional Resources

• Financing the Future reports 1, 2, 3, and 4
• Capital: Comprehensive List of HFMA Products and Services

If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble.

HFMA Wants You to Know ISSN: 1540-0697. Volume III, Issue 15. Copyright 2004, Healthcare Financial Management Association. All rights reserved.