The “Triple A” bond rating remains an elusive, if not mythical, rating for not-for-profit hospitals. The growing reliance on government payers for reimbursement and an uber-competitive operating environment will keep that rating far out of reach.
When it comes to growth strategies, however, there appears to be a new “Triple A” on the horizon. Management and hospital trustees are holding refreshed conversations around growth. Gone are the days of racking up revenues to reach an eye-popping size (“growth for growth’s sake”). While it’s true that size and scale can buy an organization time when it hits a financial ice patch, no one is too big to fail. Steward Health, with $6 billion in revenue at the time of its bankruptcy filing, serves as a good example of what happens when rapid growth is not accompanied by a well-vetted integration plan.
Growth can take two forms: organic, which employs owned assets to generate higher volume and market capture, and inorganic, which is growth through acquisition. Rating analysts will seek projections around either growth strategy and look for the growth to be measured and paced when possible. Rapid inorganic growth can occur when acquisition opportunities present themselves. In those cases, analysts will want to learn what the integration strategies and financial controls will be. When organic growth is driven by large construction projects, analysts will look to see if the organization has “off-ramps” or construction sequencing if economic or financial conditions change. In both cases, a discussion on how the organization plans to de-leverage will be well received.
Whether organic or inorganic, growth strategies should aim at achieving healthcare’s new “Triple A”:
Access. Improving patient access is not a new concept for not-for-profit hospitals as they endeavor to provide the highest quality healthcare services to their local communities. Contemporary growth strategies must include transforming from a hospital to an access company and take on multiple forms (in person, virtual, digital and physician networks). Moving with urgency is required to compete with the disruptors. Think about how vast Amazon’s One Medical distribution network is through its enviable Prime Membership (180 million people).
Accretive. Management teams are seeking growth opportunities that are accretive from Day 1. Or, if building new capacity, accretive from Year 1 following the opening. Every facility and strategy must stand on its own financial foundation. Distressed hospitals will have a more difficult time finding a partner. Gone are the days of a “search and rescue” mission to pick up a distressed hospital, unless the facility is accompanied by material state supplemental funding or new funds for capital needs. Hospitals that seek a partner from a position of strength and offer an accretive opportunity will have more choices, as buyers have a more discerning approach than in the past.
Ambulatory. Like access, growing a hospital’s ambulatory focus is not a new strategy as hospitals seek low-cost settings for clinical services that continue to shift to outpatient settings. Further, site-neutral payment legislation and Medicare’s removal of services from the “inpatient only” list will continue to drive growth strategies around ambulatory. Many hospitals are exploring innovative partnerships with other providers in the ambulatory space, which signals a new shift in thinking away from the prior, pre-pandemic belief in the importance of owning everything. HCA Healthcare, Inc. announced on its third quarter investor call that it will spend $5 billion in capital in 2024—or about 1.6x depreciation (based on FY 2023)—and cited 100 new ambulatory sites, including surgery centers that they will build or acquire. That compares to 1.2x spending for not-for-profit hospital medians. While HCA’s motivation may be different as a for-profit operator, it is a growth company and industry bellwether.
While it doesn’t start with an “A,” divestitures also are part of contemporary growth strategies as capital capacity is limited and a new economic reality has followed Covid. Management teams are critically evaluating the ability to fund capital needs of a facility or a region and the ability to bring the highest quality care to the community. Many health systems are exiting markets where they have not regained their financial footing, largely because they no longer have an essential role in payer negotiations. Other organizations are evaluating all the services they provide to consolidate services within a certain market or discontinue low volume/low margin services.
The new “Triple A” of growth is far more achievable than the original “Triple A” rating, which remains rarefied air, only assigned when debt repayment is absolutely assured. In municipal finance, the competitive enterprise sectors (which includes hospitals) with Triple A ratings are mainly limited to wealthy and highly selective colleges and universities. There are only three U.S. companies rated Triple A among the rating agencies: Microsoft Corporation, Apple, Inc. and Johnson & Johnson. The coveted AAA rating will remain an elusive aspiration for the not-for-profit hospital industry. That may be a good thing, because there’s only one way to go from there. In contrast, the “Triple A” of growth offers hospitals and health systems plenty of upside opportunity.
