THE CHALLENGES FOR NON-PROFITS

"A variety of emerging or intensifying factors threaten the future performance and credit quality of the nation’s not-for-profit health care system. Growing concerns include “unquenchable demand” for health care services and related growth in new health care technology and health care costs, the sustainability of managed care rate increases; the slow erosion of employer-based health insurance; reductions in Medicaid eligibility and reimbursement; the growing burden of rising bad debt and charity care; the government’s long-term ability to adequately fund Medicare without future reductions; and the availability of an adequate and affordable labor supply."

The above statement from the 'Environmental Scan' in the current [9/11/08]issue of H&HN magazine paints a foreboding picture for non-profit providers of healthcare. Demand for healthcare is increasing due to increasing demographic trends while the costs of developing new technologies, medications and operational costs for delivering those services are also increasing. Coupled with the financial pressures on Medicare and reimbursement cuts, it is apparent that the healthcare system is in crisis.

Where will the capital that is needed to address these issues come from? As the article indicates, performance determines the quality and amount of credit. And banks are reluctant to lend money when financial performance [profitability and balance sheet ratios] does not conform to their expectations and willingness to accept risk [the exception being the subprime mortgage market...but that is another story]. And since equity is not a viable option for non-profits, the delivery of healthcare to the most vulnerable segments of the population is at risk. Non debt or equity financing, such as that provided through Sun Capital HealthCare's Medical Accounts Receivable funding program, is a tool to both increase working capital and reduce the financial impact of cash flow problems resulting from reimbursement delays. Even though Sun Capital has kept the lights on and doors open for facilities in fiscal crisis, as well as provided the means for hospitals to grow, until the issue of rising costs is adequately solved, the scary prognostication outlined above will continue.

Wall St. vs. Main St. - Healthcare Financing

An article by Matthew Weinstock in the June 20th issue of H&HN online makes some interesting observations about the intersection of Wall St. with Main St. in setting the future direction for healthcare. Wall St. is looking for returns on the bonds they've bought while Main St. [the public] is looking for increased access to quality healthcare.

A common thread tying the two objectives together is investing in information technology. As has been discussed here before, IT investments, whether it's electronic medical records, remote links to specialists, improved operating systems and controls, etc. are seen as providing the tools needed to develop metrics and other measurement approaches for evaluating the quality of healthcare delivered by providers.

However, there is a growing gap between the elite not-for-profit health care systems with their smaller and/or rural counterparts. What worries Beth Ward, CFO for the Moses Cone Health Systems in N.C. "is an ever-widening gap with hospitals that have trouble surviving market downturns. She noted that some hospitals in North Carolina with lower credit ratings have put much of their capital plans on hold." The natural consequence of doing this will only make it harder for these hospitals to compete in the future as their ability to adapt to new market conditions, generate new revenue streams and/or develop and implement a new business model for how they operate in their market.

What the elite hospital systems rely on to support their growth and expansion is "... strong balance sheets to fund expensive information technology projects with the hope of improving patient safety and quality of care". One way for the not so succesful hospitals to improve their balance sheets is to add a MAR [medical accounts receivable] funding program from Sun Capital HealthCare Inc. to their financial toolbox.