4 Main Drivers for Middle-Market Hospital Financing

For middle-market hospitals, which are generally community hospitals with 100 to 300 beds that are not part of a bigger health system, finding money to fund capital expenditures, acquisitions or other major financial commitments is not always easy. Without a parent system or a partner, these hospitals are on the hook for all of their obligations.

Claudia Stone Gourdon, senior vice president and national marketing manager of Healthcare Finance Group, says there are some common scenarios that drive these hospitals to look for financing, such as revolving lines of credit and term loans, and there are some common mistakes to avoid in order to make obtaining debt financing easier.

1. Working capital and liquidity.
The biggest reason community hospitals look to major financing instruments involves their liquidity, or working capital position. If a hospital's short-term assets (e.g., cash, receivables, etc.) are able to pay off short-term liabilities (current debt, payables, expenses, etc.), the hospital usually is in a good financial standing. However, if a hospital's liabilities begin to pile up while assets stagnate, that is when it becomes more problematic to pay the operating bills, and financing may be needed.

Hospitals that are undergoing major cuts in Medicare and Medicaid are prime targets for working capital lines of credit. "Working capital and liquidity needs tend to show up at hospitals that have more unpredictable EBIDA/EBIDTA or that may be in a turnaround situation due to the recent economic stress and government regulatory changes," Ms. Gourdon says.

She adds that hospitals are able to use accounts receivable as collateral, and overall, these types of financings are a "win-win" because lenders are comfortable with the security of the government payments and because hospitals welcome the relatively "cash flow light," interest-only nature of the loan.

2. Growth capital. Hospitals looking to build, renovate or expand a service line are commonplace, but few hospitals can immediately shell out the millions of dollars required for these growth projects. That's where both a receivables-based revolving line of credit and a term loan can be offered and used. "When a hospital is working to implement a targeted event like a growth plan for a new program, the hospital has an idea of how much that's going to cost, and a term loan is appropriate," Ms. Gourdon says. "But it's nice to have additional availability for the unpredictability of the timing and for cost overruns, so it's a benefit to have a receivables line as well."

3. Acquisitions. Similar to growth capital, acquisition financing is event-driven where hospitals have a good idea of the cost. The difference between a growth project and an acquisition is there is generally more clarity with an acquisition, and the acquiring hospital is in a relatively strong financial state. "Middle market hospitals looking to purchase another hospital or other healthcare provider are usually in a relatively good financial position with steady or increasing EBIDA/EBIDTA and can handle more term debt," Ms. Gourdon says.

4. Restructuring debt. The worst-case scenario for any hospital is when their restructuring plan has not worked, or is not working as quickly as hoped, and the hospital needs to file for bankruptcy. Hospitals facing bankruptcy or potentially facing bankruptcy are walking on eggshells and need to use all of their assets and have a well-thought-out plan to return to solvency and to secure a loan. "If a hospital is in trouble and is under stress, we're going be careful with the financing we advance," Ms. Gourdon says. "They need to have a good plan and need to provide as much collateral as is available to secure a loan."

Ms. Gourdon adds that exiting, or coming out of bankruptcy, is also an expensive process, and sometimes specific financing is needed at that time. By definition, a hospital that has gone through bankruptcy was in its worst financial trouble before entering bankruptcy, and cash is generally needed to regain strength at exiting. Specifically, the consultants and lawyers who were involved in the bankruptcy process must be paid before a hospital can move forward again. "You can spend a lot of money on professional fees," Ms. Gourdon says. "You have to pay them before you can get out [of bankruptcy]. Hospitals can be in the weird position of being solvent and able to function again, except for needing to pay the people who helped get them back there."

Mistakes to avoid
Financing projects require a lot of time and diligence, and Ms. Gourdon says there are simple things hospital CFOs and other hospital finance leaders can do to make the process more seamless:

•    Have a good set of financial statements. It may be obvious, but a comprehensive, well-managed set of financial statements and balance sheets can go a long way to facilitating the process when a hospital is pursuing some type of financing. "Orderly financials show the hospital is committed to the process," Ms. Gourdon says.

•    Be ready and willing to talk about previous problems and issues. If a hospital has recently had an investigation from the Office of Inspector General, for example, the leadership must bring it up early, discuss what happened and be honest about the problems. If there are negative issues, they will be found eventually, so it is in the hospital's interest to be open from the get-go. "It is a big mistake to not talk about problems early on," Ms. Gourdon says. "Nobody likes bad surprises."

•    Allocate enough people and resources. "Getting financing takes time and dedication, and there needs to be one person who drives that effort," Ms. Gourdon says.

More Articles on Hospital Financing:

5 Hospital and Health System CEOs: What "Top Performance" Looks Like to Me

Physician-Owned Kentuckiana Medical Center Proposes New Financing Plan

Ascension Health to Issue $600M in Bonds to Help Alexian Brothers Acquisition

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