Debt Management: An unsolicited financial advice and recommendation for the Prince George’s Hospital Center, Maryland

The healthcare industry has seen its share of challenges ranging from new regulations to flexible strategies demanded in dealing with the new Accountable Care Organization (ACO). Shrinking profit margin has given hospitals and other healthcare organizations good reason to become very strategic in managing resources. The capital life cycle pro-vides a good foundation for managing resources. Prince George’s Hospital Center, a 269-bed acute-care hospital and regional referral center, the hospital is a member of the Prince George’s County Health System (PGHS), currently operated by Dimensions Healthcare System. The system has experienced lost market share, revenue losses, low liquidity, significant deferred capital needs, poor bond ratings, and a disadvantageous payor mix. Both the State and Prince George’s County have provided significant finan-cial support in recent years in order to keep the system functional and avoid significant operational deficits (McMullen, 2012). Prince George’s Hospital improved its credit rat-ings in September 2013. In the same market and during the same period, Suburban and Johns Hopkins Hospitals, members of the Johns Hopkins Health System’s (JHHS) (Moody’s Investor Service, 2013e) and Holy Cross Hospital, a member of the Catholic Health East Trinity (CHE Trinity) (Moody’s Investor Service, 2013c) all enjoy Aa3 rating.

The importance of successfully managing the hospital’s debt portfolio.

Prince George’s Hospital’s new rating has given bond holders a small sigh of relief as they paid down the redemption price of their bond in November, 2013, but need to do more to pay additional redemption prices, if the hospital is going to keep bond holders happy, and encourage more bond issues for projects in the future. To achieve this goal, the hospital needs to more closely and efficiently align strategic plan with the capital cycle incorporating better and more efficient balance sheet management (Reiter & Song, 2013)). In addition, it must thoroughly understand the impact of the new Affordable Care Act on the region and current hospital operation and need to incorporate many other metrics including efficiently managing average length of stays (ALOS), closer physician partnership as prescribed in its strategic plan and provide more rigorous review of the management of the Accountable Care Organization (ACO), in light of the Affordable Care Act, now upon us (Crotts, Dickson & Ford, 2005). Effective strategic planning and management of these metrics will encourage more favorable credit ratings and attract more bond holders for bond issues. The hospital enjoys a higher rating position than Shady Grove Adventist Hospital, a member of the Adventist Healthcare System (AHC) (Moody’s Investor Service, 2013d), which has a rating of Baa2 and Doctor’s Community Hospital (Moody’s Investor Service, 2013b) also with a Baa3 rating during the same period.

The current short term, long term and equity debt

The short term debt situation hinges on the hospital’s ability to pay current obligations. To that end, the hospital needs to maintain a higher day’s cash on hand (DCOH) of up to 120 days as discussed above. It may need to examine off balance sheet activities in its more visible and commercially attractive real estate assets. Selling and simultaneously leasing the space does little to disrupt operations at those locations and will reduce total liabilities, increase cash flow, DCOH and temporarily increase operating margin leading us toward a more attractive credit position in the short term. The positive impact of this analysis on profitability results from the elimination of debt and associated bond payments related to sale of the real estate, which exceeds the asset reduction, and impact of increased operating expense on the financial statements. On long term basis, the hospital needs to ensure a continuously positive operating margin and more efficient balance sheet management now to be able to meet future debt obligations. The new hospital planned for 2018 through 2021 will cost a total of $645 million including site acquisition, construction and contingencies. Both the State and Local County will contribute a total of $400 million to the project, while payment on the bond obligations for the remaining capital cost ($245 million) will beginning in 2018. It is critical that this be incorporated into our strategic plan (McMullen, 2013).

Assessment as to why these may or may not be a good mix

Effective in-depth re-examination of the hospital’s strategic plan, current financial posi-tion and incorporation of the above recommendations can have a positive impact on the hospital’s next ratings. In addition, a cultural shift from the ground up aligned to its strategic plan will sustain new operating efficiency. The drawbacks to the recommenda-tions indicated above are the difficulty in accurately staging, organizing and subse-quent implementation of the plan. Very often the devil is in the details. As it begins this process, the hospital must ensure buy-in from physicians, physician groups, nurses and administration (Crotts, Dickson & Ford, 2005). In other to effect a cultural shift, eve-ry member and stakeholder of the organization must be educated on the strategic goals. Continuing the status quo may keep the hospital on a trajectory moving from a B rating to a low A rating, but taking the time to thoroughly implement these recommendations using a flexible strategic and financial plan will enhance its financial position in the process.

Suggestions for improvement

Many organizations utilize slogans and other tools to position their goals in the minds of its members and stakeholders. Certain goals can be repeated using multiple delivery tools such as murals, motivational walls prints, messaging during telephone operator holds and other delivery methods. As the hospital moves into post ACO environment with possible large inflow of patients at reduced margin resulting from volume, it needs to also understand and embrace a closer relationship with physicians, who are essential for future profitability under the newly unveiled bundled payment scheme from Centers for Medicare services (Sharamitaro, 2011).

References

1. Carlson, D. (2005). Catch the Eye of the Capital Markets. Hfm (Healthcare Financial Management), 59(5), 50-58.
2. Crotts, J. C., Dickson, D. R., & Ford, R. C. (2005). Aligning organizational processes with mission: The case of service excellence. Academy Of Management Executive, 19(3), 54-68. doi:10.5465/AME.2005.18733215
3. McMullen, Erin K. (2012). Summary of Recommended Bond Actions. Retrieved May 8,2014, from http://mgaleg.maryland.gov/pubs/budgetfiscal/2013fy-budget-docs-capital-…
4. McMullen, Erin. K. (2013). Analysis of the FY 2014 Maryland Executive Budget, 2013 . Retrieved May 8,2014, from http://mgaleg.maryland.gov/pubs/budgetfiscal/2014fy-budget-docs-capital-…
5. Moody’s Investor Service (2013a). Moody’s withdraws Dimensions Healthcare Corporation MD’s B3 Rating. Retrieved May 8, 2014, from https://www.moodys.com/research/Moodys-assigns-Aa1-to-Prince-Georges-Cou…
6. Moody’s Investor Service (2008). Moody’s Confirms Dimensions Health Corporation’s (Md) B3 Bond Rating And Removes Rating From Watchlist; Outlook Is Negative. Retrieved May 8, 2014, from https://www.moodys.com/MdcAccessDeniedCh.aspx?lang=en&cy=global&Source=h…
7. Moody’s Investor Service (2012). Moody’s affirms Dimensions Health Corporation’s (MD) B3 bond rating; outlook remains stable. Retrieved May 8, 2014, from https://www.moodys.com/MdcAccessDeniedCh.aspx?lang=en&cy=global&Source=h…
8. Moody’s Investor Service (2013b). Moody’s affirms Doctors Community Hospital’s (MD) Baa3; Outlook negative. Retrieved May 8, 2014, from https://www.moodys.com/research/Moodys-affirms-Doctors-Community-Hospita…
9. Moody’s Investor Service (2013c). Moody’s affirms Trinity Health Credit Group’s Aa2 and Aa2/VMIG 1 and Trinity Health’s P-1; outlook negative. Retrieved May 8, 2014, from https://www.moodys.com/research/Moodys-affirms-Trinity-Health-Credit-Gro…
10. Moody’s Investor Service (2013d). Rating Update: Moody’s Affirms the Baa2 Ratings Assigned to Adventist Healthcare’s (MD) Bonds; Outlook is Stable. Retrieved May 8, 2014, from https://www.moodys.com/MdcAccessDeniedCh.aspx?lang=en&cy=global&Source=h…
11. Moody’s Investor Service (2013e). New Issue: Moody’s Assigns Aa3 Rating to an Aggregate $302.42 million of Johns Hopkins Health System’s (MD) Series 2013 and 2013A Bonds; Outlook is Stable. Retrieved May 8, 2014, from https://www.moodys.com/MdcAccessDeniedCh.aspx?lang=en&cy=global&Source=h…
12. Reiter, K., & Song, P. (2013). Hospital capital budgeting in an era of transformation. Journal Of Health Care Finance, 39(3), 14-22.
13. Sharamitaro, A (January, 2011). Healthcare Reform: Impact on Hospitals Retrieved from: http://http://www.healthcapital.com/hcc/newsletter/1_11/aca.pdf