When New Britain (Conn.) General Hospital sold $49 million in tax-exempt bonds last month, it promised to provide annual updates of its financial and operating condition.
The written agreement is contained in the loan agreement with the state bond issuing authority and the official statement that describes the terms of the bond sale for the 334-bed hospital.
The New Britain deal is one of the first offerings by a tax-exempt healthcare provider to include "secondary disclosure" language in the bond agreement, according to Roger Stephenson, executive director of the Connecticut Health and Educational Facilities Authority, the state entity that issues bonds on behalf of tax-exempt healthcare providers.
The disclosure language included in the New Britain deal stemmed from Mr. Stephenson's participation on an advisory committee convened by the National Association of State Auditors, Controllers and Treasurers, a Lexington, Ky.-based trade group.
NASACT's advisory committee recently produced draft guidelines on the types of information that tax-exempt healthcare providers should annually disclose to owners of their bonds. The committee recommended that healthcare issuers provide audited financial statements, certain data about operations and a discussion of "material information," including pending litigation.
The Connecticut bond-issuing authority plans to include secondary disclosure language in all future health and education bond agreements. "You shouldn't have paper out there without disclosure," Mr. Stephenson said. "The ability to issue tax-exempt debt inherently carries with it the responsibility of providing disclosure."
If New Britain General doesn't provide the information cited in its agreement with the Connecticut bond-issuing authority, it would be in technical default. But because the hospital already provides extensive financial data on a regular basis to the state's Commission of Hospitals and Health Care, the new requirement is "not a big deal," said Gene Curcio, senior vice president of administration.
New requirement.Soon, all healthcare providers that sell tax-exempt bonds will be required to provide annual updates of their financial condition. The mandate is part of a recent proposal issued by the Securities and Exchange Commission (March 14, p. 16).
The SEC's proposed rule would make it illegal for a broker or dealer of municipal securities to underwrite bonds unless the issuer agrees to provide annual financial information and timely notices of "material events," such as delays in making principal and interest payments or ratings changes.
The new rule is intended to better protect investors from fraud and to help them decide what securities to buy and sell. It responds to concerns over recent municipal bond defaults by non-healthcare issuers and the large volume of municipal bond issues in the past two years.
In 1993, healthcare providers sold $28.4 billion in tax-exempt bonds. But according to the SEC, healthcare providers offer substantially less information after the bonds are sold than do municipal issuers that sell bonds more frequently.
The SEC's proposed rule was published in the March 17 Federal Register and was accompanied by the SEC's "interpretation" of existing disclosure obligations under the anti-fraud provisions (See chart).
Reduced concerns.Disclosing current financial and operating information should reduce concerns about anti-fraud violations, said Andrew Kintzinger, president-elect of the National Association of Bond Lawyers and a partner with the Minneapolis and St. Paul, Minn., firm of Briggs and Morgan.
Under federal securities law, it's illegal to withhold substantive information from bondholders. However, the bondholders must demonstrate that the omission was made with an intent to deceive, he said.
Mr. Stephenson said the SEC requirement helps relieve bond-issuing authorities of the liability of passing along recent financial data to the few institutional investors who ask for it, Mr. Stephenson said. It's not fair for money managers to unload certain investments based on information they've obtained because "they knew who to call and what to ask" while individual investors may not, he said.
Rules are needed.Many municipal finance experts agree that more disclosure is needed.
The Healthcare Financial Management Association "is very supportive of providing financial operating information," said Patty Hlavinka, the HFMA's administrator of policy and government relations in Washington.
However, the SEC proposal raises a number of questions, she said. For example, what the SEC means by ongoing disclosure is open to broad interpretation, she said. The absence of a specific definition leaves much to the discretion of healthcare issuers and their bond counsels.
However, the HFMA's Principles and Practices Board is developing guidelines for hospitals that will help define the kinds of information hospitals should be disclosing. For example, the draft guidelines recommend including trends in operating results, information about risk management and plans for the future (Dec. 20/27, 1993, p. 66). Final guidelines should be ready for distribution in a month, Ms. Hlavinka said.
Under the SEC's proposed rule, pertinent information on finances and operations would be sent to "a nationally recognized municipal securities information repository." However, the proposal provides no other details on how many such repositories would be sanctioned, who would run them or how they would be financed.
Affect on costs.Depending on how
the SEC requires the information to be disseminated, "It could affect (healthcare providers') costs significantly," Ms. Hlavinka said. There are no estimates of how much healthcare providers could spend to generate or distribute such information.
But if secondary disclosure is established when the bond is initially issued, "the ongoing costs should not be too burdensome," Mr. Kintzinger said.
Hospitals and healthcare organizations already routinely provide updated financial information to their bond trustees and underwriters, Mr. Kintzinger said. When issuers are required by the SEC to submit the information to a central repository, it means more people will have access to it.
However, municipal healthcare providers can expect to pay a little more in legal fees to comply with the rule, he added. That could place a financial burden on smaller issuers.
Ultimately, it will be the responsibility of the healthcare provider and its bond counsel to decide what information to provide, Mr. Kintzinger said.
Easy access to current financial information should generate more investor interest in municipal securities, said George Braketselos, a vice president with the Public Securities Association, an international association that represents municipal securities dealers. "That part of the proposal is going to add a lot of liquidity to the market," he said.