Just as they generate some of their worst financial results ever, not-for-profit hospitals are being asked to open their books.
The National Federation of Municipal Analysts this month released a final version of its best practices for hospital disclosure (See chart).
The best practices go far beyond minimum reporting requirements for municipal securities set by the Securities and Exchange Commission, which mandate only annual financial disclosure. More important, they exceed prevailing not-for-profit hospital disclosure practices. They are intended to serve as a model both for new bond issues and hospitals with existing debt.
The guidelines are voluntary, but noncompliance could hurt hospitals when they attempt to issue new bonds by depressing market demand for their paper--at least that's what advocates for more timely and complete disclosure are hoping.
The NFMA, which has about 1,000 members, says the best practices constitute the bare minimum of information investors need to trade hospital bonds effectively in the secondary market. They mirror some of the practices already required of public companies.
Yet hospital trade groups opposed most of the key measures in their comments on the draft version of the requirements (Feb. 28, p. 50).
The American Hospital Association and the Healthcare Financial Management Association rejected requirements such as quarterly disclosure, quarterly management discussion and analysis, and reporting of systemwide results, saying they would be burdensome and misleading and would subject management to legal liability.
Hospitals were not represented on the 12-member committee that developed the guidelines, although the committee did contain hospital financial advisers and the director of an issuing authority.
Efforts to reach officials from either organization who are familiar with the disclosure issue were unsuccessful last week. Richard Gundling, senior technical director at the HFMA, says his association in June established a task force on disclosure, which will review the new standards.
Based on industry feedback, the analysts' group backed off some of its initial demands. For example, the requirement to disclose profitability data on specific managed-care contracts was dropped after hospitals said the data were proprietary. Also relaxed were guidelines for disclosure of medical staff and union activity.
NFMA officials say they limited their requests to data that are "normally monitored on a monthly basis by hospital providers." They acknowledge that quarterly management discussion and analysis could require additional work but say such information is "extremely important to the market." The organization says the release of such comments could negate the need for analysts to bombard hospital chief financial officers with phone calls when a hospital's bonds are out for bid in the secondary market.
Despite industry protest, a promise of quarterly reporting of financial data has become a standard requirement for new bond issues in the past year. Following a dramatic decline in hospital profitability since 1997, bond guarantors and investors have created a united front in their demand for better reporting. Yet even those hospitals that do issue quarterly figures often don't provide enough information to make it useful, says NFMA Chairman Dina Kennedy.
"Often when you get a quarterly (report), you just get a spreadsheet and it doesn't have any footnotes or information," says Kennedy, who is assistant chief underwriting officer at Financial Security Assurance, a New York-based bond guarantor. "We want to tell hospitals: When you send this stuff out, write a couple of paragraphs and tell us what you're seeing."
The best practices also push the envelope by calling for hospital systems to report both overall results and data for individual operating units, even if only part of the system is obligated to pay the debt. Multihospital systems are asked to report data for all units that contribute more than 15% of system revenue.
"In our view, if it took a big swing and it's generating 15% of revenue, that's material information. It gives us an early warning that something is going on," Kennedy says. She says analysts wanted a 5% revenue threshold, but hospitals balked.
Notably, the best practices skirt another touchy issue: how hospitals should disseminate information and to whom. Many hospitals file with one of several national repositories, which charge fees for access, or send data to a select list of bondholders, analysts and rating agencies.
The NFMA advocates the use of the Internet to provide free, immediate and wide access. But the group didn't want to divert attention from the main issue of complete disclosure, Kennedy says, especially since there are unresolved regulatory issues with posting financial data on the Internet.
Meanwhile, the NFMA will be turning its attention to another volatile industry: long-term care. The organization is assembling a new committee to produce disclosure guidelines for that industry, and a first draft is due in May 2001.
"Recommended Best Practices in Disclosure for Hospital Debt Transactions" is posted on the NFMA Web site--www.nfma.org.