Journal of Healthcare Management - May/June 2013 - (Page 168)

I N T E G R A T E D h E A L T h s y s T E m s How Might a Reforming U.S. Healthcare Marketplace Threaten Balance Sheet Liquidity for Community Health Systems? Daniel K. Zismer, PhD, Wegmiller Professor in Healthcare Administration and director, MHA and Executive Studies Programs, University of Minnesota, Minneapolis o n the basis of any conventional methods of evaluating balance sheet liquidity for U.S. health systems1, it might appear that some of the larger systems, as measured by asset base and operating revenue performance, are getting stronger. Even some midsized community health systems seem to be performing better in terms of such liquidity measures as cash-to-debt ratios, days cash on hand, and other related metrics. However, a closer look at the future of strategic investment plans for U.S. community health systems should cause leaders to reconsider perspectives and conventions on balance sheet liquidity sufficiency. According to Jay Sterns, director at Barclays Capital: If the largest, U.S. not-for-profit health systems were to consolidate, forming a unified “firm,” this new entity would generate an estimated $77 billion in annual operating revenues and hold an estimated $35 billion in cash and cash equivalents—an estimated 198 days cash on hand (approximately $0.50 of cash on hand for every dollar of operating revenue generated annually). By comparison, a large, U.S. public company, such as Apple, may have an estimated $0.77 of cash on hand for every dollar of annual operating revenue earned. Rating agency medians for days cash on hand for AA-category health systems, as published in 2011 by Moody’s and Standard & Poor’s, were 226 and 215, respectively. If the governing board of our fictitious consolidated healthcare firm elected to maintain a AA credit rating, it would have little, if any, discretionary cash to invest in the organization without pressuring its liquidity ratios to the point of a potential downgrade. This perspective on liquidity should lead executives of U.S. healthcare systems to question the conventional methods for evaluating financial strength and sufficiency of liquidity positions, especially as health systems encounter market environments that could call for unprecedented levels of liquidity to fund a range of strategies, strategic capital needs, and clinical programming redevelopments. Steve Proeschel, managing director at Piper Jaffray, comments: There is little doubt that many of the likely “reform era” strategies will pressure health system balance sheets. Implementation of [electronic health record] systems, together with other strategic investments, will strain cash positions for many health systems. Balance 168

Table of Contents for the Digital Edition of Journal of Healthcare Management - May/June 2013

Journal of Healthcare Management - May/June 2013
Contents
Interview with Thomas C. Dolan, PhD, FACHE, CAE, President and CEO, American College of Healthcare Executives
Equity in Care: Picking Up the Pace
How Might a Reforming U.S. Healthcare Marketplace Threaten Balance Sheet Liquidity for Community Health Systems?
Assessing the Productivity of Advanced Practice Providers Using a Time and Motion Study
A Positive Deviance Perspective on Hospital Knowledge Management: Analysis of Baldrige Award Recipients 2002–2008
How to Improve Breast Cancer Care Measurement and Reporting: Suggestions from a Complex Urban Hospital
The Fear Factor in Healthcare: Employee Information Sharing

Journal of Healthcare Management - May/June 2013