Hedging their bets. Strong market performance is delivering pleasantly surprising results for investments made by not-for-profits

CFOs aren't partying like it's the 1990s, but healthcare portfolios did deliver double-digit increases in 2003, a Commonfund Institute survey said. Executives, seeking to avoid losses, have invested in controversial hedge funds, which have become a little too popular, says the institute's executive director, John Griswold, left.

Critical access hospitals enter a new era of capital finance

One day this month, with the grand opening of Rio Grande Hospital in Del Norte, Colo., the healthcare industry will have cause to celebrate the completion of the first critical access hospital (CAH) financed with bonds enhanced by HUD FHA-242 mortgage insurance (average interest rate: 5.45%; rating: AA/Aa/AA).

Capital access

To maintain their viability, hospitals are being compelled to invest in big capital projects such as information technology and renovation and construction. This gatefold examines the trends in credit and capital, and how they affect hospitals' access to money.

Capital allocation. Three cases of financing the future

In hospitals and health systems, numerous worthwhile capital projects are competing for limited capital. Hospitals face demands for technology upgrades, facility renovations, and new services. Some projects cannot be delayed, even though they do not bring a direct financial return. Certain services are not themselves profitable but serve as patient gateways to more profitable services.

The hospital bond market and the AHERF bankruptcy

An analysis of hospital, tax-exempt bonds issued before and after the Allegheny Health, Education, and Research Foundation (AHERF) bankruptcy demonstrated that despite the decline in market rates for tax-exempt securities in the post period, bonds issued by hospitals and systems carried higher coupon rates than they did in the pre period. There was a significant decline in the proportion of hospital/system bonds that were insured from the pre to the post period. Bond insurance firms tightened their credit criteria after the bankruptcy, which may explain, in part, why the proportion of insured bonds declined. We conclude that hospital bonds are now viewed as riskier instruments than they were prior to the AHERF bankruptcy. This is reflected in higher coupon rates for both insured and uninsured bonds and fewer insured bond issues. This decline in hospital creditworthiness comes at a time when many hospitals need to replace aging assets and acquire new technologies in response to increased inpatient utilization.

How have hospital investments navigated troubled waters?

The dismal stock-market returns of the past few years compel hospitals to examine their investment policies. The asset-allocation decisions of hospital CFOs and trustees generally are based on market trends. Some of their key concerns include volatility of investment returns, lack of internal resources for investment support, trustee and committee fiduciary and investment education, and retaining experienced investment advisory services.

The health care safety net: money matters but savvy leadership counts

The nation's health care safety net--heavily reliant on external funding and support--is uniquely vulnerable to shifting and often adverse market and policy conditions. While adequate funding is essential to ensuring safety net providers can care for low-income people, the Center for Studying Health System Change (HSC) has identified a number of other factors key to building and maintaining viable community safety nets. Throughout the four rounds of HSC's Community Tracking Study (CTS) site visits, researchers have found that strong political and organizational leadership, community support, collaboration and business acumen have helped safety net providers build capacity and improve care coordination for low-income and uninsured people. These characteristics and business strategies have strengthened many community safety nets, better preparing them to weather current economic problems and providing a road map for the potentially tougher times ahead.

Capital investment in public hospitals

Capital investment is a major concern for public hospitals. Relative to operating expenditures, it has been almost constant for 40 years, despite great changes in technology and patient throughputs. Research studies during the last decade suggest that over that time almost all investment has been on simply replacing existing assets. Per person, the total capital stock has actually declined. However most replacement outlays are predictable. Although major building outlays may still need some central supervision, equipment replacement can be projected with enough confidence to fund it through operating grants. Using data from several surveys, some capital-weighted DRGs have been developed and a funding system suggested.

Positioning hospitals for improved access to capital

Hospitals need to actively position themselves in the next 18 to 24 months to ensure continued access to financing. Hospitals need to shift their focus from investment income to operations. Hospitals should recognize the importance of balance-sheet liquidity to institutional investors. Not-for-profit hospitals should focus on both sides of the balance sheet. Healthcare executives need to develop effective leadership and investor-relations skills.

NFP Investor Conference. Growth is back in sight

In a whirlwind of high-stakes meetings in New York City in mid-May, two dozen of the nation's largest hospitals and health systems strutted their stuff with a single goal: securing their future. Their message was clear: back-to-basics works, and now it's time to grow the business. Executives from 23 providers outlined their work on increasing revenue, boosting margins and shoring up balance sheets. They presented their market positions, strategic initiatives and financial results for investment analysts, credit raters and bond traders. The third annual Non-Profit Healthcare Investor Conference was co-sponsored by the American Hospital Association, Health Forum, the Healthcare Financial Management Association and Salomon Smith Barney. The focus on growth doesn't come without challenges Several common themes emerged from the presentations, among them pressure on reimbursement, workforce shortages, liability insurance issues and capacity constraints. Yet executives agree: it all comes down to the basics, and building the strength to keep their missions alive. As Thomas Meier, vice president and treasurer of Oakland, Calif.-based Kaiser Permanente, put it: "No margin, no mission, no más."

Bond-market skepticism and stock-market exuberance in the hospital industry

The hospital industry needs funds to refurbish physical facilities, upgrade clinical and information technologies, and rebuild financial positions weakened by past external challenges and unwise organizational strategies. The financial markets offer a marked contrast in capital access, as bond creditors remain skeptical while stock investors plunge back into the once-shunned industry. Ironically, high stock prices may drive the for-profit chains to repeat past cycles of overexpansion, while weak bond ratings may save non-profit systems from a comparable loss of focus on the core business of operating and improving inpatient facilities. This turbulence has implications for public payment, antitrust, and financial disclosure policies.