Healthcare organizations should understand the difference between meeting their legal obligation in making financial disclosures to investors and providing the types of financial disclosures investors want to receive.
Just as hospitals and health systems must gain the trust of the communities they serve as providers of care, they must also establish relationships of trust with the investor community, including investors, lenders, credit providers and rating agencies.
The more investors are familiar with and have positive impressions of a healthcare organization, the more demand there will be for that organization’s bonds. And with greater demand comes lower cost and better terms.
Building an investor relations strategy
Leading health systems are adept at promoting familiarity and positive impressions among the investor community. They build and maintain trust by regularly and clearly communicating their key objectives, priorities, strategic initiatives and strengths through formal investor relations programs.
Following the example of these industry leaders, healthcare organizations should consider the following five best practices in developing their investor relations strategy.
1. Share the positive and the negative. Transparency is critical. Healthcare organizations should be forthright in disclosing performance trends and operating challenges that could influence an investor’s perception of the organization. Material developments that may affect a corporation’s operations or prospects also should be disclosed.[a]
Healthcare leaders also should exercise caution in communicating expectations of future performance. Future performance is difficult to predict, and leaders should be careful not to over-project performance — whether positively or negatively. Doing so could unintentionally mislead investors.
Nonetheless, a hospital or health system may find proactively sharing expected changes in their financial position before they occur can build investor confidence and trust in the organization’s management team.
One multihospital system on the East Coast, for example, experienced three years of strong financials, but leaders anticipated the organization’s financial performance would decline as capital spending levels increased and the organization made critical investments necessary to thrive in a competitive market. Leaders worked to crystallize key messages and shape the narrative it would present to investors, focusing not only on the health system’s historical performance, but also on the expected downturn during a period of transition for the health system. They also explained why leaders believed cash flow would improve by the end of the year.
The strength of the messages presented and the leaders’ transparency in approaching the capital markets ultimately helped minimize rating downgrades during a period of transition for the health system.
2. Use apples-to-apples comparisons. Sometimes, the financial metrics shared by an organization vary from one period to the next, making it difficult for investors to accurately gauge performance. Ensuring that the same metrics are used consistently enables credit analysts to better understand trends and engender trust.
3. Ensure integrity of information. Organizations should provide current financial information and update or clarify material financial information known to be outdated or misleading. To avoid disseminating such information in the first place, organizations should establish procedures for internal control over financial reporting. Care should be taken not to omit any data or information required to ensure the information provided is accurate and not misleading.
4. Consider disclosing terms and covenants of private placements with banks and other investors. Privately placed municipal securities and bank loans have become more common alternatives to traditional public offerings and can constitute a significant portion of an organization’s total debt. Until 2019, organizations were not legally required to disclose any details regarding such private financings. However, such disclosures are required in continuing disclosure agreements entered after Feb. 27, 2019. In practice, disclosure of details of these private placements and bank loans has varied across the market but is expected to increase.
Even organizations that are not legally required to do so may find disclosure to be a best practice. Posting information about alternative financings to the Electronic Municipal Market Access database (EMMA) provides investors with access to key information that informs their investment decisions.[b]
5. Share the organization’s long-term vision and its strategy for mitigating headwinds in the industry. Credit analysts appreciate insight into a hospital or health system’s strategy and are more apt to recommend an organization for investment if they are familiar with the organization’s management and strategy.
For one Southern health system, communicating the cultural change occurring within the organization instilled a sense of trust among the investors. Leaders who were not meeting the organization’s strategic targets were let go, and they were replaced by a team of existing staff who could successfully engage staff members across the organization in achieving higher levels of performance. The new leadership team conveyed confidence, competency and a sense of calm that investors viewed favorably. The result: The health system avoided downgrades to its credit rating and achieved attractive yields that lowered its cost of capital to fund new projects.
Legal requirements versus investor expectations for disclosure
Although applicable securities laws and regulations govern certain levels of disclosure, there is a difference between what is required by law and what investors often want to know.
Disclosure requirements. Hospitals and health systems need to understand what they are required to disclose, short of giving away confidential strategic information. Important considerations include knowing when strategies for pending partnerships, such as mergers or joint ventures, should be shared and when a significant error in a cost report should be disclosed.
The SEC requires that, when underwriting bonds of the type issued by most hospitals and health systems, bond dealers must ensure that the “obligated person” (the entity legally responsible for payment of the debt obligations) enters into an agreement to provide certain financial information related to the securities on an ongoing basis to the Municipal Securities Rulemaking Board (MSRB). This information includes operating data and event notices, such as bond calls, rating changes, loan defaults, mergers, bankruptcies and, for disclosure agreements entered on or after Feb. 27, 2019, material events. Examples of material events include these circumstances:
- Where a material financial obligation or agreement is incurred to covenants, events of default, remedies, priority rights or other similar terms that affect security holders
- Where there is a default, event of acceleration, termination event, modification of terms or any similar event reflecting financial difficulties
Disclosure rules also specify what, how and when to disclose. In most cases, annual disclosures must be submitted on or before the date specified in the continuing disclosure agreement or notice of failure to do so must be submitted to the MSRB through EMMA. Often, organizations engage a “dissemination agent,” such as a bond trustee or financial adviser, to assist in posting the required information.
Investor interests. When evaluating an organization’s financial profile, investors are interested in what is driving the organization’s financial performance, its prospects for future performance and the risks the organization faces. Often, explaining these factors goes beyond what is minimally required under law.
For example, credit analysts typically review a healthcare organization’s enterprise and financial profiles, taking a close look at the income statement and balance sheet, market share, outpatient volumes and inpatient admissions, diversity of revenue sources and debt service requirements. They also consider the strength of the management team and the quality of care provided.
Meanwhile, securities laws and their accompanying regulations provide guidance regarding what type of information must be disclosed, the appropriate timing for disclosure and how often healthcare organizations must share financial information with investors. Organizations also must agree to meet certain continuing disclosure obligations in connection with any public offering.
Many hospital and health system leaders do not always have a clear understanding of what they can disclose. Disclosure rules can often be confusing and, as a result, legal and financial advisers are commonly relied upon for compliance in this area. While leaders should, of course, rely on outside counsel and others when considering their disclosure obligations, a clear understanding of those obligations and how they affect the organization’s standing in the market is critical. Health systems should work not only to comply with their legal and contractual requirements, but also to do so in a way that enhances investor relations.
At times, health system leaders fear disclosing too much information could lead to the loss of competitive advantage in their market. However, these concerns can be managed in a compliant and strategic manner that provides investors the desired level of ongoing information while protecting the health system’s key business initiatives. Reaching out to investors only when in need of financing is simply not the best approach.
Because of rules prohibiting selective disclosure, organizations may also be hesitant to disclose information in certain settings for fear that not all investors will have access to the information. Such selective disclosure can create legal issues for an organization, but this risk may be managed via internal policies and procedures. For example, if an organization is concerned that information in a conference presentation may not be readily available to the entire market, the organization could publicly post the presentation to EMMA to ensure the information is generally available to the market.
Enhancing Transparency — and Trust
As health systems grow larger through mergers, acquisitions, partnerships and joint ventures, fiscal transparency is critical. Hospitals and health system leaders should aim to build long-term credibility and positive brand awareness with investors by maintaining a steady and reliable flow of information through regular communication and timely public financial disclosure. Doing so will help to optimize the costs of capital — and support a healthier bottom line.
How health systems approach investor relations
As health systems have become larger through mergers, acquisitions and other types of affiliations, their need to develop formal investor relations policies is stronger than ever. Examining the policies put in place by other health systems is a good place to start.
As publicly traded companies, Nashville-based HCA Healthcare and Dallas-based Tenet Health, two of the largest health systems in the country, have extensive investor relations programs. Both post a calendar of events, including upcoming investor conferences and calls, on the investor relations section of their websites. Tenet also sends calendar invites for investor calls. These health systems also provide links to the webcasts and presentations delivered at investor conferences.
Many large, not-for-profit healthcare organizations have taken a similar approach, posting comprehensive financial information on their websites, in addition to the information they are required to disclose on EMMA. Examples include the following.
Ascension in St. Louis (operating revenue of $23.2 billion in FY18, with 141 hospitals in 22 states) posts quarterly and annual consolidated financial statements, management discussion and analysis of financial conditions, and liquidity summaries.
Cleveland Clinic in Cleveland (operating revenue of $8.9 billion in FY18) issues information on its mission, values, integrity and innovations, and business ethics. The health system also issues an annual “State of the Clinic” report that highlights the health system’s clinical, financial and outreach efforts, among others.
Trinity Health in Livonia, Michigan (operating revenue of $18.3 billion in FY18, with 93 hospitals in 23 states) hired its first investor relations manager in 2015. The health system issues audited and unaudited quarterly and annual financial statements and investor presentations, as well as a detailed management discussion and analysis.
UPMC in Pittsburgh (operating revenue of $19 billion in CY18, with multiple hospitals, outpatient facilities and other healthcare-related businesses) has an extensive financial disclosure policy that includes voluntary compliance with Sarbanes-Oxley regulations (accounting rules intended for the corporate sector), which is an uncommon practice for a not-for-profit. Other financial information the health system discloses includes an unaudited quarterly disclosure of consolidated financial statements as well as bond ratings and disclosures.
[a]. Healthcare organizations should consult with their legal and financial advisers when designing such a strategy and in making the types of disclosure described here.
[b]. EMMA is funded and operated by the Municipal Securities Rulemaking Board, which Congress has charged with promoting fairness and efficiency in the municipal securities market.