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What’s Ahead for Healthcare Organizations: An Interview with Moody’s Lisa Goldstein
From reform to the economy, the forces affecting the financial health of hospitals are hard to predict and plan for. If anyone understands those forces, it’s Lisa Goldstein, senior vice president and healthcare team leader for Moody’s Investors Service—just one of the industry heavyweights you’ll see at this year’s ANI: The Healthcare Finance Conference. We recently asked Lisa for a preview of her ANI presentation.
Lisa Goldstein, Moody's Investors Service
HFMA: What should be on the radar for healthcare finance executives in 2010?
Goldstein: Although progress on healthcare reform legislation has stalled in the wake of the Massachusetts election, the prospect of healthcare reform—and its financial impact—should remain on the radar for healthcare finance executives. The issue of healthcare reform has not gone away, and whether Congress ultimately passes some form of the current House or Senate bills or tries to fashion a new bipartisan compromise, Medicare reimbursement will be at risk for reductions. So, the longer-term impacts from healthcare reform and the shorter-term impact from Medicare reductions should be on the radar screen for healthcare finance professionals.
Hospitals also are revisiting their organizations’ investment allocation styles. Many not-for-profit hospitals accumulate cash on their balance sheets, as they have for many years—it’s an important credit factor from a ratings perspective—but over the years, many organizations have become more sophisticated, and some have become more aggressive, in their investment allocations. We know that many organizations revisited their investment allocations in 2008 and 2009; I would expect that in 2010, hospitals will continue to reexamine and question past investment practices.
Many hospitals also have revisited their capital structures—how their debt or bonds are structured—and I would imagine that will continue in 2010. Access to capital will be a function of how the market is performing, and there is no crystal ball that can predict what interest rates are going to do in 2010. Debt structures certainly came under high scrutiny in 2008 and 2009, and there are still hospitals that are revisiting their debt structures to lower their risk elements inside their debt structures. So I think that is going to be on the radar of healthcare finance executives for 2010.
Most hospital executives also are very concerned about the scrutiny over tax-exempt status. This is something that has always been in play, but I think the tax-exempt status of not-for-profit hospitals has been under even more scrutiny recently because healthcare reform has once again put the spotlight on the not-for-profit hospitals. As healthcare reform continues to shine a spotlight on not-for-profit hospitals’ financial performance, tax-exempt status and the way in which tax-exempt status is justified—by charity care? community benefit? teaching costs? research costs?—will be on the radar for hospitals and healthcare finance executives.
HFMA: Is access to capital expected to improve in 2010?
Goldstein: We don’t know. A lot of it is going to depend on how the markets function—what interest rates will do—and we don’t have that crystal ball to know how interest rates are going to move. We had an unprecedented period in late 2008 when lower-rated hospitals could not access the market, where heretofore they could access the market—they might have paid higher interest rates to their bondholders, but they could access the market. That window closed in 2008. It slowly reopened in toward the end of 2009—we’ve seen lower-rated credits issue debt—and depending on when (these hospitals) issued the debt, they may have gotten a more favorable rate than if they had issued the debt a month later or a month prior. So it’s very hard to know how the markets are going to cooperate or not cooperate in 2010. The markets are hard to predict.
HFMA: What are key strategies hospitals should be undertaking to preserve liquidity?
Goldstein: We’ve seen a host of strategies being undertaken by hospitals to preserve liquidity. For example, we’ve seen hospitals reduce their capital spending. Let’s say they had budgeted $100 million (for capital expenditures); they may have scaled back and spent only $60 million. We’ve also seen many hospitals reexamine their multiyear capital plans and make changes to protect their liquidity. For example, maybe before the credit crisis there was a plan to build a new patient tower. We’ve seen hospitals go back to the drawing board after the credit crisis and say, “Maybe we don’t need a new tower; maybe it needs to be five stories, not seven stories.”
In addition to downsizing capital spending to preserve liquidity, we’ve seen more attention being paid to revenue cycle management—efforts to process claims and patient bills more efficiently and accurately, as well as initiatives centered around reimbursement (securing the optimum level of reimbursement more quickly). Some hospitals have changed their investment policies to try to reduce their exposure to the stock market and try to limit declines in the value of their cash liquidity. We’ve also seen an increase in outsourcing of revenue cycle, billing, and central business office functions to experts in these areas. There’s a cost to outsourcing these functions, but it may be that an outside firm can manage these functions better and cheaper than the hospital can do with its own staff.
There has also been a much greater engagement of hospital management with its board of trustees for guidance, expertise, oversight. This type of engagement is needed, especially during challenging economic times. In times of crisis, you turn to other people, and having access to a board of trustees with members that in many cases have lent their expertise and provided guidance to the senior management team is very important. This type of guidance is needed now more than ever.
Education of board members regarding hospital operations also is important, particularly in an industry as complex as health care. A hospital’s financial performance can turn very quickly. Board members should be knowledgeable in the complexities of running a hospital and of healthcare finance. Such knowledge will enable board members to have a big picture understanding of hospital operations and ask questions of management, test theories, challenge assumptions, and provide critical, insightful thinking regarding how to approach challenges facing the organizations they serve. At the same time, it’s important that boards not take over day-to-day operations of hospitals. That is why senior managers are hired.
HFMA: Is there anything you’d like to add?
Goldstein: I think we’re going to see more consolidation in not-for-profit healthcare. The merger and acquisition chatter out there is very high right now, and as Medicare reimbursement is tightened, some of the small to midsize, independent hospitals will likely look for a partner. A hospital may be well positioned, but if its competition down the street is going to now join a larger system with deeper pockets, it can quickly shift the playing field. This is something that should be on the radar of hospitals and healthcare finance executives.
Goldstein will present “Navigating the Capital Market in 2010″ at ANI on Tuesday, June 23, as one of the industry leaders in the new Featured Speaker Track. To find out more, see Speaker Highlights.