Some things painfully clear

Vanishing cash has been a major source of anxiety for healthcare finance executives since stock markets’ gut-wrenching drop in the final months of 2008. For the nation’s weakest hospitals, the economy’s accelerated slide late last year drained already meager cash reserves and put some afoul of lending agreements. But the nation’s weakest hospitals were not in New York recently for an investor road show jointly sponsored by two healthcare trade groups and the major healthcare underwriter Citigroup.

Some of the nation’s strongest hospitals and health systems came to New York for the annual Non-Profit Health Care Investor Conference, an event now in its 10th year that puts tax-exempt borrowers, investors and analysts together for two days to talk operations, strategy and finance behind closed doors.

The gathering gives investors access to municipal borrowers in closer fashion to the disclosure provided by publicly traded companies. The event is not open to the media. Modern Healthcare is allowed access to hallways outside rooms where borrowers present and field questions. Curiously, this year’s theme was transparency. Despite limited access, the event did offer one look at how the other half, the industry’s “haves,” are weathering upended credit markets and the sour economy.

Not surprisingly, among the 28 hospitals and health systems that went before investors to talk numbers and strategy, those that closed their books at the end of December reported the most precipitous cash declines. Balance sheets for these systems include the punishing quarter after Lehman Brothers filed for bankruptcy and the emergency federal bailout of global insurer American International Group.

Catholic Health East, which owns 22 hospitals and is rated A1, A, and A- by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, ended its fiscal year in December with roughly 47 fewer days of cash than the prior year. Days of cash is a key measure of financial health. It is the number of days a system can operating on savings alone. Robert Stanek, the Newtown Square, Pa.-based system’s president and CEO, as he left a question-and-answer session, said the system’s credit rating means it could gain entry to tight credit markets—though it would cost more—but executives have put their focus on rebuilding Catholic Health East’s balance sheet.

SSM Health Care, a 15-hospital system based in St. Louis with AA- ratings from Standard & Poor’s and Fitch Ratings, reported its reserves were nearly cut in half to 166 days at the end of 2008 from 243 days the prior year. Texas Health Resources, rated A3 by Moody’s and AA- by Standard & Poor’s, saw its cash plunge to around 165 days from roughly 221 days at the close of 2007. The Arlington, Texas-based system owns 13 hospitals. And the prior year wiped 50 days of cash from the balance sheet for University Hospitals, rated A2 and A by Moody’s and Standard & Poor’s, an eight-hospital system based in Cleveland, Ohio.

Systems with June and September fiscal years did not emerge unscathed. Ascension Health, the largest U.S. Catholic and private not-for-profit health system with a record of healthy profits and a reputation for sophisticated financial management, reported its cash reserves dipped 12% in 2008 from the prior year.

Ascension, a 77-hospital system with a June 30 fiscal year, finished fiscal 2007 with 207 days worth of cash. By June 30, 2008 the figure dropped to 185 days and it continued to slide to 145 days as of April 30, according to materials distributed to the more than 500 attendees.

Overall, conference presenters, which account for over $33.8 billion of long-term debt, reported an aggregate operating income of $3.5 billion for the most recent fiscal year, but after factoring in investments, aggregate net income dropped to -$1.8 billion. Presenters’ average operating margin was 2.5% but the average profit margin was -2.3%.

Robert Shapiro, senior vice president and chief financial officer for North Shore-Long Island Jewish Health System in Great Neck, N.Y., said he has not seen such uncertain credit markets since the Allegheny Health and Education Research Foundation collapsed into bankruptcy in 1998 with more than a half-billion in outstanding debt.

North Shore-LIJ, which owns 10 New York hospitals and holds an investment grade A3 rating from Moody’s Investors Service and an A- from Fitch Ratings, will soon seek $400 million from investors to add an eight-story tower to its Katz Women’s Hospital at Long Island Jewish Medical Center in New Hyde Park, N.Y.

For Shapiro, the shaky credit markets mean he cannot be sure of how North Shore will structure its debt or how much interest the system will ultimately pay to borrow, he said, “I have thoughts.”

Shapiro said though widely acknowledged, it is important to make clear to investors the extraordinary stress on balance sheets that stems from the recent volatile investment market. “You have to explain that,” he said.

Melanie Evans covers finance and governance news. She also covers healthcare business news in Connecticut, New Jersey, New York and Pennsylvania.

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