S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Not-For-Profit Health Caregroup, Standard & Poor’s evaluates the scope ofsuch ventures and assesses their impact on thesystem’s creditworthiness.System CompositionThe system’s individual components also are important.Answers to the following questions are criticalto system evaluation:■ In a system where members are geographicallydispersed, are they located in markets with favorableeconomies and are they competitively positionedwithin these markets?■ How integrated is the system from an operationsand finance perspective?■ What are the size, geographic location, and marketposition of the group’s major acute-care players?■ Is the system constrained by any regulatory, competitive,reimbursement, or economic environments?■ Are the scope and types of services variedthroughout the system?■ How effective is management at correcting problemsubsidiaries?■ Has management demonstrated a willingness todivest non-profitable subsidiaries?In addition, Standard & Poor’s evaluates eachentity’s percentage contribution to net revenues,assets, and profits, financial and admission trends,payor mix, and overall profitability. These factorsdemonstrate the degree of financial, geographic,and risk dispersion in the system. Positive ratingfactors associated with systems include managementexpertise, access to capital, economies ofscale, pricing flexibility, and the use of corporatepersonnel, centralized cash management, developmentof centralized information technology expertise,and insurance and pension trusts. In additionto these traditional strengths, the newly added systemsdemonstrate regional dominance through verticalintegration and the ability to adapt to localmanaged-care penetration. Also, in most cases, systemshave larger, more diverse revenue bases, makingthem less vulnerable to reimbursement andmarket pressures.Board and managementThe organizational structures of health care systemsvary considerably, based on board philosophy, aswell as more practical factors, such as the system’ssize, services, and geographic scope. These factorstranslate directly into the level of corporate controland the degree to which centralized services areavailable to subsidiaries.Regardless of a system’s organizational structure,management must be able to control the dynamicsassociated with a large corporation. Typically, ahealth care system has greater financial resourcesthan a single hospital and, consequently, greaterfinancial flexibility. Rating benefits derived from thisflexibility depend directly on the system’s ability tomanage these resources. If growth is being pursuedaggressively, what is the size of the overall capitalplan, how much debt is being used to finance newprojects versus internal cash flow, and are the plansprudent? Conversely, if the system is over bedded oroperating unprofitable ventures, is the flexibilitybeing used as a cushion to delay decisions? Is managementwilling to make hard decisions to divestunprofitable or non-strategic subsidiaries? Theseissues highlight management’s ability, as well as thefinancial planning capabilities of the system.Successful health care systems include regionalproviders offering a continuum of services, as well asthe more traditionally defined multi-hospital systems.The role of the board and its interaction with themanagement team continue to be areas of analyticalfocus, and a meeting with a member of the boardof trustees is desirable. The board’s size, composition,structure, and activity are noted, with particularconsideration given to its participation in settingstrategic and financial policies. In addition manynot-for-profit boards have adopted some or all ofthe rules articulated in the federal Sarbannes-Oxleylegislation. It is helpful to understand the Boardview of these rules and what, if any, have beenadopted by the Board.Major distinguishing factorsIn assessing the credit strength of various types ofsystems, Standard & Poor’s draws three major distinctions.First, distinctions can be drawn betweensystems formed by natural market synergies overtime and those formed more recently because ofmarket pressures. Whether they are regional ornational, the more mature systems formed over timegenerally are better positioned to take advantage ofthe incentives in the current health care market,while recently formed systems face the challenge ofinternal system integration, in addition to a multitudeof external pressures. While there still are benefitsto multi-state providers, including economic andregulatory diversification, national systems must createor participate in local mini-systems to competewith strong regional systems and alliances.Second, distinctions can be made between systemsthat have a salaried, hospital-based medicalgroup and those with a traditional medical staff. Asrevenues continue to be limited, systems that controlphysician resources will be best positioned tocontain expenses and maximize margins.For health systems that own their own managedcare plan, Standard & Poor’s evaluates the strategicand financial contribution of the plan. Criticalareas of analysis include:www.standardandpoors.com157