Lest anyone underestimate the huge expense of developing and starting fully integrated healthcare delivery systems, the authors of a new study have taken a stab at quantifying the capital requirements.
The current capital needs of all "emerging healthcare organizations" are estimated to be in the $20 billion range. That projection is based on the capital requirements of more than 100 respondents to a recent survey who said they expect their costs to total some $1 billion over the next several years.
"We clearly knew there were going to be very substantial capital requirements to fund these different organizations," said Don Carlson, president of Ziegler Securities, the Chicago-based investment banking firm that conducted the survey and provided the analysis. It's "obviously a huge amount," Carlson said of the $20 billion tab.
To put that total into perspective, the report said tax-exempt healthcare bond volume in 1994 was $16 billion.
Ziegler co-sponsored the survey with Integrated Healthcare Report, an industry newsletter; the Medical Group Management Association, a Denver-based organization representing physician groups; and the IPA Association of California, an Oakland-based not-for-profit group representing independent practice associations.
The results are compiled in a 26-page report, "Capital Survey of Emerging Healthcare Organizations."
The respondents represent some 445 "emerging healthcare organizations," defined as organizations consisting of hospitals, physicians and payers that have consolidated, merged, integrated or affiliated in response to managed-care pressures and healthcare reform.
Some 55% of responses were from physician groups, and 45% came from hospitals or hospital systems. A total of 115 organizations responded to the section on future capital requirements.
Interestingly, just 42% of respondents had identified their organization's future capital needs, while 44% had not. That's probably because many EHOs remain in the early stages of formation, the report said.
Much of the consulting work taking place today involves how to structure these new organizations, "but there isn't a lot of planning on how to access capital," Carlson said.
In the early stages of development, EHOs' capital needs tend to be smaller, he said. But as they begin to require working capital and information systems, "the funding needs start to grow very rapidly."
For example, the survey found that the median amount of capital an IPA requires is $1 million, while the median capital requirement for a more tightly configured management service organization is three times that amount (See chart). By definition, an MSO provides management services to medical practices and may purchase the hard assets of physician practices, so its capital costs are usually higher than those of an IPA.
Since many hospitals may sell tax-exempt bonds, they generally are viewed as having deeper pockets than physician groups. Some 94% of survey respondents identified as "hospitals employing physicians directly" said they qualify for tax exemption.
However, physicians who seek to create integrated systems on their own credit strength face higher hurdles. Commercial banks generally have shied away from investing in what has been a fragmented segment of the healthcare industry and often aren't interested in loaning the smaller amounts of capital physicians require.
The survey, conducted last September, did not address credit quality issues, although future surveys may. And while it raised the issue of capital needs, it didn't speculate on the funding sources that may feed EHOs' $20 billion appetite.
Carlson expects to see a lot of creative financing vehicles come into play, including joint ventures, private placements and venture capital. Until an EHO attains the size and builds the financial muscle necessary to tap traditional forms of debt and equity, there will be a large need for alternatives, he said.
The second annual survey of EHOs, building on data from the first, will begin in the next month or two.
Copies of the report cost $38.50 and are available by calling Elizabeth Winters at Ziegler at 800-366-8899.