Nonprofit Hospitals Acting Like Big Business by Wooing Bond Investors

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May 18, 2016; Wall Street Journal

Nonprofit hospitals can’t sell stock, but they frequently issue bonds to pay for capital expenditures like new facilities. Larger health systems require significant investment to build and equip these facilities, and minor changes in interest rates and finance terms can make a big difference in borrowing costs. This has led some nonprofit healthcare systems to establish investor relations positions similar to those found in large for-profit corporations, holding investor briefing calls and “roadshows” to meet with investors and bond analysts.

This outreach is important because the investors and bond analysts are nervous about the future ability of health systems to repay bondholders and frustrated by what they see as a lack of transparency. According to a recent study, more than half of U.S. hospitals lose money on patient care, and many of those who make money don’t make a lot. Shrinking gross margin percentages are masked by large gross margin dollar amounts reported by health systems. Bond issuers attempting to assess risk—a key factor in setting interest rates and fees—find that key financial information like outstanding bank loans isn’t required to be reported to regulatory bodies. As reported in the Wall Street Journal, “‘It’s alarming to these public bondholders that there’s not more information made available,’ said John Cheney, a managing director at health-care financial adviser Ponder & Co.” The health systems going to the trouble of travelling the country meeting with investors and analysts are sympathetic, but sometimes reluctant to share detailed financial and performance information for fear of losing competitive advantage. One health system CFO said, “Our competitors are mining our data, as we look at theirs.”

Since the passage of the Affordable Care Act, hospital mergers and consolidations have become the norm. As NPQ has reported, the basic philosophy of the ACA is that both quality and cost-effectiveness in healthcare delivery will be improved when patients are served over time by a coordinated provider network that can monitor health and promote wellness as well as treat illnesses.  “Population health management” requires integrated health systems providing comprehensive care to large numbers of patients, spurring both hospital mergers and hospital closures.

It’s unsettling but perhaps unsurprising that charitable nonprofit hospitals that have grown into charitable nonprofit multibillion-dollar integrated health care systems are adopting practices associated with the world’s largest for-profit corporations. Investor relations efforts might make some wonder: Can a nonprofit grow out of being a nonprofit, and, if so, how and when?—Michael Wyland