Hospitals are notoriously shy when it comes to discussing their finances.
That conclusion has the investment community hoping to coax not-for-profit hospitals into disclosing more financial data.
The Pittsburgh-based National Federation of Municipal Analysts, which represents nearly 1,000 analysts and portfolio managers, has been working on a set of best practices regarding hospital financial disclosure, and is making a major push to get hospitals to comply (See chart). A final version is expected to be released this spring.
The American Hospital Association has taken issue with some of the group's draft proposals but backs the effort to get hospitals to be more forthcoming. If they aren't, government regulators might step in, says Michael Rock, an AHA lobbyist.
The Municipal Securities Rulemaking Board, a self-policing agency for the industry, will hold two forums on the healthcare disclosure issue: March 13 in New York and March 17 in San Francisco. Information is available on the board's World Wide Web site, www.msrb.org.
Public companies that issue corporate bonds or stock are required by the Securities and Exchange Commission to disclose detailed operating information. But not-for-profit hospitals and other organizations in the municipal markets are not subject to the same depth of regulation.
Bond-offering agreements usually require hospitals to issue annual reports. In 1994 the SEC implemented a minimal annual reporting requirement for municipal credits. But traders of bonds on the secondary markets would like data more frequently, preferably every quarter.
Analysts and investors say hospital bonds are just as volatile as corporate credits and require the same quality and timeliness of data. According to the federation, the SEC requires brokers to assess the suitability of an investment before a sale, which is impossible without frequent and complete disclosure. Some hospitals have actually reduced their disclosures since the SEC implemented a minimum requirement in 1994, the federation says.
Andy Matteis, who runs the municipal bond research department at Boston-based Putnam Investments, says "no ironclad disclosure regulations" exist for not-for-profit hospital credits, and that puts traders at a disadvantage. He says some hospitals simply fail to return phone calls or refuse to provide information to investors. Some hospitals have cited insider trading rules as a shield against disclosure.
"It's a very difficult issue. We need to price (bonds) every day," says Matteis, who sits on the federation's board. "An annual report is not enough."
Both hospitals and investors are trying to reach a consensus, Rock says. In recent months, the AHA has been educating members about the importance of disclosure. "We've definitely been beating the drum on it," he says.
However, the AHA has taken issue with some proposed best practices. For example, it opposes quarterly reporting of unaudited financial statements within 60 days of the end of the period. The association calls such a requirement burdensome and potentially misleading. It also says some requested information, such as managed-care contracting activity, top-revenue-generating physicians and union activity, might be anti-competitive.
The hospital industry's most frequent complaint about the draft best practices is the volume of information requested, says Tom Weyl, manager of municipal research at Eaton Vance Management in Boston. He says changes in the final version will address some of that concern.
The Healthcare Financial Management Association, which represents 33,000 finance executives, has its own guidelines, which call for annual rather than quarterly reporting. Richard Gundling, the HFMA's technical director, says among other things its members complain that issuing quarterly statements would generate mounds of extra work.
Some say hospitals with weak credit have begun to pay a premium for staying mum, in the form of much higher interest rates during the past year.
"Right now, it's a buyer's market," Matteis says. "If (hospitals) want to do good deals, they're going to have to start disclosing."
He says more hospitals already are committing to regular disclosures in order to attract buyers.
Some industry leaders say such reporting should be standard practice, not subject to negotiation.
Liz Alhand, senior vice president of finance at SSM Health Care, a 20-hospital system based in St. Louis, says investors and credit analysts have a right to be well-informed.
Many hospital credits have changed their formal bond agreement-
known as a master trust indenture-
in recent years to a corporate model, doing away with outdated covenants that put member hospitals on the hook for debt of the parent corporation, Alhand says. At the same time, she says, hospital systems must expect to be treated more like corporations when it comes to communicating with investors.
"We've become contemporary in our legal documents, and we've tried to stay in the Dark Ages when it comes to our reporting," she says.