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Healthcare
Financing and the Chief Development Officer
by Mike Geaney, Vice President
In the last 35 years, since the enactment of Medicare and Medicaid, the healthcare industry has never been as challenged financially and has never been as dependent on philanthropy to provide a margin for excellence.
There are certain facts about healthcare financing that Chief Development Officers (CDOs) and healthcare executives need to understand and be able to articulate to donors:
Aggregate healthcare costs will continue to increase.
Revenue constraints and the accompanying pressures on cost will continue to grow.
Sources of capital will continue to diminish for not-for-profit healthcare providers.
Philanthropy has become and will be an increasingly important source of capital for not-for-profit healthcare organizations.
To understand why healthcare costs will increase, just look at the growing elderly population. Americans are encouraged that the average life expectancy continues to increase. This aging of America is most dramatic when we consider the rate of increase in the "frail elderly," the population over age seventy-five. During the last decade the U.S. population has increased by about 10%, and the segment over the age of sixty-five has increased approximately 12%; however, during the same period, the population of those ages 65-74 was essentially unchanged (+1%), while the population over the age of 75 increased by an astounding 27%. Given that the over-seventy-five population consumes approximately seven times more healthcare services than the population under the age of sixty-five, the cost of healthcare must increase.
Another influential factor increasing the cost of healthcare is developing technology. We continue to benefit from technological advances, which provide increasingly effective and efficient solutions to clinical problems. For example, great strides have been made in imaging techniques, surgical procedures, anesthetic agents and pharmaceuticals; most of which are the result of expensive private sector investment, often accompanied by lengthy approval processes which lead to higher costs. We love technology, and it invariably receives unbridled support. In fact, technological advances are the backbone of quality healthcare. Therefore, technology will continue to drive healthcare costs higher.
The aging of America, coupled with our love of technology, makes clear that increases in the aggregate cost of healthcare are inevitable. It is also certain that state and federal governments, and employers paying health insurance premiums, will continue their efforts to contain costs. When general economic conditions are favorable, businesses and the government will spend less time bewailing the cost of healthcare, but it would be wrong to expect these pressures to abate for any significant length of time. The already thin operating margins in hospitals throughout the country will continue to erode in such a climate. In places like Massachusetts, where operating margins are almost non-existent, further deterioration of operating positions will certainly increase the number of defaults on loans, and even bankruptcy or closure considerations.
Access to Capital
What does this mean for access to capital in the healthcare industry? There are essentially three methods for generating capital to support the nearly insatiable capital needs of healthcare providers: robust operating margins, debt financing, or philanthropic gifts.
In the face of the aforementioned revenue/cost pressures, healthcare providers will be hard pressed to meet capital needs from operating revenue.
The ability to borrow is driven by the underlying creditworthiness of the borrower. Bond ratings, and the restrictive covenants underlying public debt instruments reflect the levels of accountability demanded by creditors. Given the stringent reimbursement agreements required by managed care companies, and the reimbursement issues surrounding Medicare, threshold financial requirements have become more and more difficult to meet. It is also noteworthy that tax-exempt bond issues are purchased predominantly by tax-exempt mutual funds. These mutual fund companies interest is in the creditworthiness of the debt issuer/guarantor. Therefore, healthcare debt instruments compete with issues supporting sewer districts, educational organizations and other not-for- profits, all of which have considerably less revenue/cost pressures than healthcare.
For sheer efficiency, you can’t beat philanthropy. Borrowing $10 Million for twenty-five years at 6% will cost $9,329,042 in interest payments. Alternatively, at even five cents per dollar raised, ($500,000 on $10 million) the relative cost efficiency of philanthropy is remarkably compelling.
The quality of healthcare organizations continues to be dependent, in substantial part, on the currency of their technological capabilities, which is dependent on their ability to access capital funds. If the healthcare industry cannot generate sufficient income from operations to meet capital needs, and if the criteria for borrowing remains stringent, then the importance of philanthropy skyrockets.
It is not reasonable to expect donors to fully understand this, nor is it reasonable to expect donors to appreciate the implications of the analysis on the vitality of the healthcare system. The responsibility for communicating these realities and the resulting implications rests with the leadership of the organizations impacted. Chief Development Officers and executives need to step up to the plate, cogently explain what is at stake and empower donors to recognize the inestimable value of philanthropy.
