November 19, 2003
Facing rising demand, aging facilities, and other capital spending imperatives, many hospitals may be challenged to access enough capital to meet their communities' burgeoning healthcare demands in the coming years. In fact, according to the first "Financing the Future" report from HFMA in partnership with GE Healthcare Financial Services, the number of hospitals defined as having broad capital access is dropping and the number of hospitals defined as having limited access to capital is dramatically rising.
A widening gap between the "haves" and "have nots"
Between 2001 and 2002, the percentage of hospitals defined as having broad access to capital declined from 42 percent to 36 percent, according to the report, which is based on research conducted by HFMA and PricewaterhouseCoopers LLP. However, the percentage of limited-capital-access hospitals rose even more sharply, nearly doubling from 11 percent to 19 percent, indicating a widening gap between hospitals in strong and weak financial health. Operating margins for both hospital types also declined, but by a much more significant amount for limited-capital-access hospitals, further separating the "haves" from the "have nots." Factors such as bed size, ownership, teaching status, and geography are some of the key differentiators between the groups.
A number of states are home to a high percentage of limited access hospitals. Ironically, the states with a high concentration of limited-capital-access hospitals, such as New York, Hawaii, and the District of Columbia, are also those that depend on health care as an industry to support the state economy. This trend raises several red flags, as the growth of the healthcare industry may be slowed in these regions, significantly affecting the local economies.
Shifting away from traditional sources
Findings suggest that hospitals maintain a wide range of funding sources - both external and internal; however, those sources are changing. The total amount of capital accessed from traditional sources (tax-exempt and taxable bonds, equity, bank loans, philanthropy, and equipment leases) dropped 29 percent between 2001 and 2002, from $51.4 billion to $36.5 billion. The mix of traditional funding sources has also shifted dramatically, with the proportion of bank loans falling from 36 percent to 7 percent between 1997 and 2001 and the proportion of leasing increasing from 7 percent to 16 percent.
The most common form of external capital for hospitals, tax-exempt bonds, grew as a proportion of traditional capital sources from 39 percent to 54 percent between 1997 and 2001, although the dollar value of the bonds declined from $21.2 billion to $19.8 billion. These changes are likely the result of a combination of external and internal factors, including Medicare payment rates and rising costs. The squeeze on traditional sources has led many hospitals to seek alternative means of capital, making a facility's total volume of capital difficult to measure. For example, while the sale of medical office buildings was up 22 percent in 2002, this trend was partially fueled by hospitals selling assets to raise capital and gain control of their balance sheets.
Financing solutions are still available
Despite these trends, capital is available, even to hospitals with a shaky financial profile. Following a careful examination of key financial, demographic, and performance characteristics associated with hospitals classified as having broad and limited access to capital, the report concludes that hospitals with poor financial profiles are more highly leveraged than hospitals with excellent financial profiles, thus indicating that these hospitals have been acquiring capital either from alternate sources or before the period examined.
Hospitals seeking to make their case to capital suppliers should consider the following practical suggestions:
- Know thyself. WAudio Webcasth the trends in your own numbers and benchmark yourself against reasonable competitors.
- Know the gap. Set a series of organizational goals in terms of overall leverage and profitability; set a goal for return on investment (ROI) of future expenditures. Run financial scenarios that show you achieving those goals over a period of time, and figure out how big the difference is between what you are and what you want to be.
- Know what you want. Understand the financial implications of the strategies you want to achieve and the services you want to provide. See what services make and lose money now; are there any that are not core to your mission that you can divest? Understand the ROI of any expenditure you plan to make in the future.
Conclusion
"These research findings show that a combination of inadequate payments and rising costs make it difficult for hospitals to display the kind of balance sheets traditionally associated with easy capital access," noted HFMA President and CEO, Richard L. Clarke, FHFMA. "This is a real challenge today given the intense need for capital to support increasing demand and new technology."
SOURCE:
How Are Hospitals Financing the Future? Access to Capital in Health Care Today.
- Read Report #1 now. (members only)
- Non-members may purchase the report here.
Additional Resources
- Capital: Comprehensive List of HFMA Products and Services
- The Future of Not-For-Profit Healthcare Capital Financing
- Black Ink: Capital Archives
- Black Ink: Capacity Planning Articles
- Internet Guide to Capacity Planning
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 II, Issue 24. Copyright 2003, Healthcare Financial Management Association. All rights reserved.