Health care finance principles and practices

Health Care Finance

One of the things people should know is that the landscape for health care is not good at present, especially in the not-for-profit sector. We are definitely running a not-for-profit health care institution here at VGH. Consider the Moody's Outlook for 2012, which is currently negative. There are a number of challenges that institutions like ours face, and will be explained in this article.

Hospital revenue growth for the next 18 months is forecast to be modest, but there are further issues that complicate the situation. For example, the expectations for the economy in the coming months remain poor. There will also be operating pressures resulting from regulatory changes and these will also include balance sheet challenges. The ultra-low interest rates on our debt are especially challenging to our ability to invest for the future.

Some would argue that there are opportunities in the market, for example mergers and acquisitions that will allow us to gain synergies, the reality is that these types of moves are defensive in nature - we would rather excel in our operations as a means of providing sustainable returns to our shareholders. Mergers and acquisitions only provide an exit strategy in unfavorable markets, which if we are committed to not earning a profit is probably all the time.

However, the opportunity presented by mergers and acquisitions is countered by a number of threats, especially those posed by the stock market, which as of 2012 is in the third year of what will be at least a five-year rally. The Moody's report cites "investment value losses caused by continuing volatility in the equity and bond markets," which of course is what happens when the stock market rallies for three years and the bond market remains completely unchanged during that time.

There are, of course, legitimate operating challenges that we face. Payers for medical care are using their bargaining power -- especially Medicare and Medicaid -- to prove affordable care for Americans, which cuts into the profits we aren't earning as a not-for-profit health care provider. There are other complications to our business, like non-cancelable leases and pension obligations and capital spending from cash reserves -- decisions that have nothing whatsoever to do with management.

In 2014, there is nothing more important than dealing with the challenges of 2012. Especially now that the Affordable Care Act has come into effect, completely changing the economics of the health care landscape. Our operating environment was and is challenging in that as CFO and CEO we have to make hard decisions about operations in the face of changing environments. This is by no means easy -- making tough decisions and having vision is not really what we had in mind when we took the job -- and therefore we call upon the community to understand that it is difficult for a not-for-profit health care institution to earn profits for its shareholders.