Hospital chief financial officers are finding they have yet another information demand from lenders-the outlook for their institutions under managed care.
In addition to reams of financial data, hospital borrowers are being asked to assess the impact of managed care on balance sheets. Bankers want to know how much risk hospitals will be assuming and whether they have systems in place to track expenses and price accordingly.
"Capitation is just something that we're clearly starting to focus on," said Rich Harte, a vice president and team leader in the not-for-profit group of Chemical Bank in New York. "That is risk that hospitals have never taken on before."
Chemical Bank has more than $1 billion in commitments to not-for-profit healthcare providers, primarily hospitals.
Getting a handle. Industry observers
believe that managed care could shrink healthcare costs by a third. Hospitals that assume the risk of providing services for a fixed fee must have a handle on the cost of providing those services or risk losing their shirts.
"Part of the due diligence is determining the level of economic risk the hospital is taking by entering these managed-care contracts," said Jack E. Wells, vice president and credit officer in the public banking credit department at First Chicago, which has more than 100 relationships with large, investment-grade hospitals.
The Chicago-based lender is asking hospitals for different kinds of information than it did three to four years ago, particularly "how they're transitioning to a more integrated, managed-care environment," Mr. Wells said. Management must be able to supply details on different payment methods, such as the amount of per-diem, per-case and capitated payments the hospital receives and the number of people covered by capitated contracts, he said.
Numbers, please. With the growth of managed care, the ability of hospitals to track their costs is a growing concern, said Elliott Jones, a managing director in Chase Manhattan Bank's healthcare finance division, which serves for-profit healthcare providers.
According to Chemical's Mr. Harte, "The one thing that we really want to get a handle on is what it costs an institution to provide managed-care services...so it's very important to have good (management information) systems and cost-accounting systems."
For the past two to three years, Chemical has asked hospital customers to provide statistics "to show us where they're most efficient," he said. The bank also is seeking more information on how services are being priced, he added.
Hospitals that establish themselves as marketplace leaders will have an easier time securing loans, lines of credit, letters of credit and cash management services, bank officials said. Identifying those leading institutions is becoming a key element in the banking industry's due diligence process.
"As a lender our challenge is to identify survivors," said Gary Dorsch, a senior vice president at NationsBank in Baltimore. The bank's Mid-Atlantic operation has more than $500 million in commitments to the healthcare industry.
"We're trying to identify who's going to be here in the next five years" by focusing on management, he said. Lenders at NationsBank are spending more time trying to understand management style, strategic direction and management information systems, Mr. Dorsch said.
Market strength. Meanwhile, Chase Manhattan Bank is placing more emphasis on market strength than ever before, said Mich Bayley, a vice president and head of the healthcare finance division, which serves for-profit hospital companies.
And the quantity of hospitals isn't as important as the market quality of those facilities. The fact that Columbia/HCA Healthcare Corp., for instance, has lots of hospitals in many markets is not as important as its share of each of those markets, Chase's Mr. Jones said. For smaller chains, attaining a dominant position in a local market is even more important, Messrs. Bayley and Jones said.
Jay A. Neveloff, a partner with Kramer, Levin, Naftalis, Nessen, Kamin & Frankel in New York and a specialist in "workout" strategies to restructure troubled hospitals' financial commitments, said bankers are interested in hospitals' long-term future and what managed care will do to their financial viability. "(Chief financial officers) are more and more being put to the test to explain why they need the money, how they're going to use it...and whether their institution is going to be viable," he said.
Despite the extra hoops that hospitals must jump through, it appears to be worth the effort. The nation's money center banks are seeking hospitals' business, and they're competing intensely to get it, bankers said.
"It's not a bad time to be a healthcare borrower," Mr. Jones said.