Wednesday, October 29, 2008

Health Care's Response to the Volatility of the Markets

The never-ending fluctuations in the U.S. equity and debt markets over the last several months—which of course have been particularly intense in the last several weeks—have caused all health care leaders to pause to review their investment portfolios.

Although historically the income from investment portfolios has not been used to support operations, but rather to fund capital expenditures, the declining operating margins in U.S. health care over the last several years has changed this dependency somewhat. Therefore, the decline in the values of investment funds is not only putting capital projects at risk, but will also be affecting the operations of hospitals and health systems throughout this country.

Practically every CFO--including ours at CHRISTUS Health--thinks the changes we are seeing could never have been predicted and certainly fit into the totally “unexpected” category. This volatility clearly supports a recent projection by the American Hospital Association that approximately 1,200 hospitals in the U.S. may be forced to declare bankruptcy this fiscal year, a position that is supported by the Health Care Financial Management Association. Perhaps there is no better time in history to pause and see the advantage of being part of a larger system that began this market decline with moderate operational results and extremely strong balance sheets.

Although both have declined in recent years and months, the very size of health care systems and their accompanying balance sheets allow them able to tolerate such declines for a much longer period of time. The reality of this situation is clearly visible to CHRISTUS Health, in that three hospitals have already declared bankruptcy in several of our regions, with two already closed and the other participating in a due diligence process with us, contemplating a sale to CHRISTUS Health in the near future.

What can we do, then, in this period of time to remain focused on operations and create stability in our systems while stability, however long, is re-established in the markets? To begin, we need to take the long-term view, and--based on the history of market’s ups and downs--recognize that some time in the future the markets will re-establish themselves at an acceptable level.

However, because this time frame for stability is unknown, a health system leadership team should rethink their building projects and their capital expenditures. CHRISTUS Health prepared itself for this higher level of scrutiny two years ago by establishing a system capital allocation committee, which meets three times a year to determine how the capital will be distributed to our regions and programs in order to support their capital budgets and master building plans. With the volatility of the market, this process can be quickly controlled by determining the capital which can be safely spent and limiting the building projects to those that are already in progress and hopefully financed with bonds. All this is being done at CHRISTUS Health as we speak.

And finally, four years ago, CHRISTUS established an Investment Committee, a subcommittee of the Finance and Strategy Committee of our board, to provide outside expertise to our financial leadership team so that our portfolio is reviewed on a regular basis. During this period of time, the investment committee has been engaged at an even higher level with more frequent discussions and reviews to determine if CHRISTUS Health is doing everything possible to decrease its investment risks, including the reduction of our risk premiums on our debt obligations. One of the key responsibilities of both management and leadership is to serve as stewards of our resources. Although careful scrutiny of our operating and capital budgets is an ongoing process by management and the fiduciary overview of the system is an ongoing responsibility of the board, these extremely volatile economic times require that both scrutiny and oversight be taken to a higher level, which is characterized by more frequent conversations between leadership and governance as well as more frequent sharing of data relating to our financial and investment performance.

As we have repeatedly said, transparency is a key part of the CHRISTUS brand, and it is our commitment to complete openness and honesty that will serve us well as we continue our Journey to Excellence while creating new and different action plans to address these economic challenges.

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