In Idaho, an indebted not-for-profit hospital that has had a surge in its days in accounts receivable or a significant slip in debt service coverage might get a call from Neil Moss, executive director of the Idaho Health Facilities Authority.
Moss, who receives quarterly financial statements from hospitals with outstanding bonds, is likely to ask for the reason for a financial setback. The authority might recommend that the hospital hire a consultant to fix the problem. On rare occasions, it might even require that the hospital engage a turnaround expert.
The authority can do this because, though its primary role is to act as a conduit for issuing tax-exempt hospital bonds, it wields significant power to oversee the financial health of hospitals that use it to access debt.
Issuing authorities, whose names go at the top of every offering, use their influence behind the scenes to monitor financial indicators and even orchestrate changes in management and financial processes at hospitals. Some also screen borrowers to assess risk before they agree to issue debt. In some states, their activity has increased as hospitals have encountered pressure from the Balanced Budget Act of 1997 and other forces.
Authorities can require hospitals, as part of their bond agreements, to provide quarterly financial indicators, a right that even many bond investors do not have. Some authorities also require that hospitals agree to hire a consultant approved by the authority if the facilities fall into technical default. In some cases, they have the ability to approve the scope of a consulting engagement as well as who conducts it.
Typically, authorities are funded by fees from hospital borrowers.
"I know of situations where (authorities) have been the facilitator for significant change: the firing of a CEO and the hiring of a new one (or) a complete change in financial reporting," says Michael Irwin, a managing director at Salomon Smith Barney in New York.
The most active authorities tend to be statewide, such as those in Connecticut, Michigan, Maryland, Massachusetts, New Jersey, New York and North Carolina, industry sources say. Fitch analyst Jordan Melick says some authorities, such as Connecticut's, are so knowledgeable that he calls them when he can't obtain information directly from a hospital.
County and municipal authorities, which predominate in the Southeast and Southwest, tend to be more hands-off, says Jerry Fiorina, executive vice president of Chicago-based Ponder & Co., which analyzes healthcare issues for authorities in Colorado, Idaho, Illinois and Indiana.
Fiorina says some authorities are looking more critically at long-term-care credits, which have been responsible for a significant number of recent defaults, including asking for a feasibility study or market analysis before agreeing to issue bonds. In some cases, he says, an authority might require that riskier bonds be sold only to institutional investors.
Authority officials take their responsibilities seriously. Moss says his job is to ensure that hospitals in the state have access to capital, and that means they have to satisfy bond investors by maintaining financial strength. Moss is proud of the fact that the Idaho authority has issued $870 million in debt in its 19-year history without a payment default. He wants to keep it that way.
"My attitude and the attitude of my board is that healthcare is vitally important, and it needs to remain viable in Idaho," says Moss. "If one of our issuers goes into default, it gives a black eye to every other issue with the name of Idaho on it."
The authority's contracts require that hospital borrowers provide extensive quarterly financial indicators. They also give the authority the power to require that a hospital hire a turnaround expert if it falls into technical default, which has happened four times in the authority's history, according to Moss. In three of those cases, he says, the hiring of a consultant led to new management.
Two years ago the authority even created a service called the Rural Technical Assistance Program to subsidize financial consulting services for rural hospitals. So far, nine hospitals have the program, which has cost the authority about $120,000, Moss says. The authority has annual revenue of $920,000.
Another example is the Dormitory Authority of the State of New York, which administers a state-funded pool to help financially troubled hospitals adopt new structures in the wake of rate deregulation that took effect in January 1997. At least 10 hospitals have received loans under the program, with the largest being a $24.5 million advance to Brookdale Hospital Medical Center in New York City for a restructuring plan.
Spokeswoman Claudia Hutton says the authority likes to believe that its monitoring and turnaround assistance has played a role in helping hospitals avoid payment defaults after rate deregulation and the federal balanced-budget law, which reduced Medicare funding. Like Idaho, the authority has never had a payment default.
"We feel a fiduciary responsibility to the bondholders," Hutton says. "If our bonds fail, then we fail."
The authorities, which are represented by a 30-member National Council of Health Facilities Finance Authorities, argue that their supervision benefits hospitals by reassuring investors and improving the marketability of their bonds, which leads to better rates on debt.
Irwin says there is no question that bonds issued through the most-vigilant authorities are priced more favorably for borrowers, but it's hard to quantify.
Perhaps surprisingly, hospitals say they generally welcome the intervention. "Given the choice between not having access to capital and accepting oversight, the industry would rather see the dormitory authority alive and well," says Ray Sweeney, executive vice president for policy at the Healthcare Association of New York State.
Douglas Johnson, chief financial officer of 156-bed St. Joseph Regional Medical Center in Lewiston, Idaho, who serves on the board of the Idaho authority, says urban hospitals support the authority's efforts to assist rural providers because the small hospitals serve as referral sources. "If you go back to the charter for the Idaho Health Facilities Authority, it was intended to bring low-cost financing to hospitals and ensure the viability of healthcare resources throughout the state," he says.
The Idaho authority also provides aggregate financial data that hospitals can use as benchmarks. That was one of the unforeseen benefits when 25-bed Minidoka Memorial Hospital in Rupert, Idaho, tapped into the Rural Technical Assistance Program, says hospital Administrator Carl Hanson. The county hospital, which issued a $3.2 million private placement through the authority, hired a consultant to improve its cash reserves and accounts receivable.
Hanson says borrowing at tax-exempt rates through the authority saves about 3% in interest compared with a taxable bank loan. "I don't feel they are out of line by asking facilities to maintain better performance," he says.