Why hospitals' credit decisions are more difficult than ever: 8 thoughts from Peter Myhre, SVP with Wells Fargo

Peter Myhre discusses the three most interesting things he's seeing in healthcare, trends for outpatient care, and the type of provider group Wells Fargo is spending the most time with.

Question: When did you join Wells?

Peter Myhre: I joined Wells Fargo in January 2009.
Q: What is your position?

P.M.: S​enior Vice President, Healthcare Specialty Markets Manager
Q: What does Wells Fargo Equipment Finance Healthcare Group do?

P.M.: We provide equipment and project financing solutions to healthcare providers, vendors and the companies that support the healthcare industry. Given W​ells F​argo's national presence and reputation, we work with a significant variety of healthcare companies.
Q: Where is the focus of the Group today and why?

P.M.: The Group's focus is on identifying opportunities with healthcare providers where Wells Fargo can deliver the best financial solutions. With the resources of Wells Fargo and the size of the healthcare industry, we have relationship management banking teams dedicated to different segments within healthcare; and have specialized product teams, such as the Healthcare Equipment Finance, that provide customized solutions for healthcare providers. Given the number of new priorities that cross a CFO's desk today, providers are looking for financial institutions that have a broad understanding of their business and a range of specialized products to meet their needs.
Q: Do you see the further growth of outpatient businesses?

P.M.: If our business is any indicator, then yes. Based on the changing economic healthcare business model, the demand for outpatient care will only increase while the number of acute care beds will become a fraction of what we have in the U.S. today. New therapies, improving medical techniques and innovations in technology will continue to expand the procedures that can be safely done on an outpatient basis. As standard pathways of care continue to evolve, better outcomes and lower costs will push more care away from the hospital to an outpatient setting. Accelerating this changeover are new venues such as urgent care clinics, health and wellness centers, kiosks at larger employers and new entrants such as big box retailers. Another development reducing the demand for receiving care in a hospital is the increasing awareness and public apprehension surrounding hospital-acquired conditions.​
Q: What are two or three of the most interesting things you see in healthcare today? ​
P.M.: a.​ ​We are seeing an encouraging alignment of interests between the patient, insurer and provider that I'm not certain was possible before. As each of us is asked to shoulder a greater percentage of our healthcare costs, the relationship with our insurers is becoming less adversarial and more collaborative. For example, the discounts the insurers negotiate with the providers now benefit the patient directly. The tone of the conversation with many providers is changing as well, with Wells Fargo financing more outpatient projects involving hospitals and physicians sharing ownership and control. ​The constituents are largely in agreement that delivering value is the principal objective, or they understand it is only a matter of time until their business will be dependent on delivering against that objective.
b. ​Another observation is that the calculus for making capital investment decisions has changed dramatically for healthcare providers. Readmissions and hospital acquired conditions now have a price tag. Under a fee-for-service reimbursement model, improving patient care may have had no economic benefit or the benefit was too difficult to quantify to be included in any ROI analysis. Under a population health reimbursement model, the economic benefit becomes real.  
c. ​My third comment is to highlight the challenge lenders face in their risk assessment of a particular healthcare provider and justifying the investment decision. There has never been so much uncertainty about the providers that will be successful under reform and those that will not have the cash flow to pay their debt obligations. Typically you could rely on historical financial statements as a relatively reliable indicator of future performance. A highly regulated and static reimbursement model in healthcare reduced uncertainty. That is not the case today.
Today, an investor has to look as closely at subjective factors, such as management's ability to make changes as the industry changes, as they do the financial statements. We are seeing more variability in hospital earnings already; and with CMS reporting that they intend to have 50 percent of reimbursement tied to value-based programs by 2018, earnings will be even harder to predict. New reimbursement models are shifting the financial risk of taking care of a patient population from the insurers to the healthcare providers. The uncertainty created by an industry under transformation makes the credit decision more difficult today than ever. When banks and other debt holders make their investment decisions, the assumed default rate is typically well below 1 percent, leaving very little margin for error in the investment decision.
Q: What kind of provider does the group spend the most time with? ​

P.M.: It would be reasonable to assume it would be hospitals given the constant reporting on industry consolidation, physician employment and practice acquisitions. That is not the case; we are spending more time with physician groups. While the number of physician practices will decline with industry consolidation, the practices are becoming larger, more sophisticated and choosing to remain independent. They are investing in their businesses, which require capital and looking for ways to improve their operations, which opens the door to the variety of financial solutions Wells Fargo has to offer.   
Q: Are you still fanatical about physical fitness?

P.M.: Yes, staying in shape is still a significant part of my life. Returning to my hometown of Minneapolis with Wells Fargo, I've added outdoor hockey to my winter schedule, which is a nice change from mountain biking, my warm weather passion. But I'm not the exception to the rule here in Minnesota, where physical fitness and getting outside year-round, regardless of the temperatures, is more​ ​the norm.

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