Let's all put on our corporate finance caps. First, think General Motors Corp. Now think Columbia/HCA Healthcare Corp.
In 1996 and beyond, even the Catholics, Baptists and Mount Sinais of the world will be borrowing financing tools from corporate America and for-profit healthcare.
Traditional sellers of tax-exempt bonds, particularly those with healthier credit ratings, will be adding more taxable debt to their portfolios. Such debt carries fewer restrictions than tax-exempt-bond financing, and chief financial officers needn't worry about limits on the use of the proceeds or the number of times the debt may be refunded, as they would with tax-exempt bonds.
Systems that have plenty of cash to hedge against peaks in interest rates will take greater advantage of the flexibility that variable-rate financing offers.
A financing last fall by the nation's largest tax-exempt nursing home chain offers a glimpse into possibilities for the future. Adapting a financing instrument pioneered by the automotive industry in the mid-1970s, Evangelical Lutheran Good Samaritan Society issued $27 million of medium-term taxable notes. It's the first time a tax-exempt healthcare provider has used medium-term taxable notes, said David Johnson, a director in Merrill Lynch & Co.'s Chicago office.
A $150 million cap on outstanding tax-exempt debt for "nonhospital" projects prevents Good Samaritan, based in Sioux Falls, Iowa, from going back to the tax-exempt market. With maturities generally ranging from three to 10 years, the medium-term notes provided a flexible, low-cost alternative to traditional 30-year tax-exempt bonds. Johnson hopes to replicate the financing technique for other healthcare providers.
Increasingly, physician groups also will take advantage of taxable-bond financing. Proceeds will fund ongoing capital needs, from satellite clinics to information systems. Some groups may be expected to reimburse hospitals that have supported their practices through years of losses.
Healthcare CFOs will look to corporate America for lessons on eliminating costs. Inner-city and teaching hospitals facing reductions in Medicare, Medicaid, graduate medical education and uncompensated-care funding must be particularly relentless. It may require a top-to-bottom overhaul of how business is done.
Securitization, a financing technique used in other industries to turn accounts receivable into cash, may become more commonplace in healthcare. Financial services companies are rolling out new programs aimed at providing working capital to hospitals, nursing homes and physician groups.
Following the lead of their corporate brethren, more healthcare CFOs will seek to maximize the value of real estate assets. More sale-and-leaseback deals are inevitable, while new off-balance-sheet financing techniques will be pioneered.
The one thing that not-for-profits don't have-but wish they did-is access to public equity capital. InteCare, a new Dallas-based company headed by longtime not-for-profit healthcare executive John Casey, is designed to pave the way for some leading not-for-profit hospitals to tap the equity markets (Nov. 6, 1995, p. 3). If the venture succeeds, it could become an industry model.
Dreaming up legal structures that would allow integrated delivery systems to tap the stock market should keep attorneys and investment bankers well-fed into the next century.