financial and bond services for hospital market

Financial Advisory &Financial Advisory & Acquisition ServicesAcquisition Services

Market Segment BriefMarket Segment Brief

October 2008October 2008

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DISCLAIMER

Information Advantage Group (IAG) prepared this report as a general guide and basis for further discussions and diligence on the select area of healthcare—Financial Advisory and Acquisition Services.

This report includes qualitative and quantitative statements that reflect plans, estimates, data, consensus views and beliefs of vendors, industry experts and commentaries provided by public sources and IAG analysts. Best efforts have been made in assessing the reliability of these statements. IAG disclaims all warranties, express or implied, as to the accuracy, completeness or adequacy of such information and fitness of this research to a particular purpose. IAG shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. IAG advises that any discussion or listing of a company or product of any kind in this report should not be deemed to be an endorsement of said company or product. The opinions expressed herein are subject to change without notice.

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Each resource cited in this report is the property of the originating author or publisher and will not be individually reproduced or distributed by the reader. VHA may contact organizations directly for copies or reprint authorization.

Copyright 2011 by: IAG LLC, 3757 Webster Street, Ste. 306, San Francisco, CA 94123. All rights reserved. Duplication or distribution of this document as presented without express written permission from IAG LLC is prohibited.

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without the express written permission of IAG LLC, San Francisco, CA 415-346-3860.

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Table of Contents

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EXECUTIVE SUMMARY..............................................................................................................4PROLOGUE..................................................................................................................................5OVERALL DESCRIPTION............................................................................................................6 Implementation – Strategy & Posture......................................................................................6 External Factors - Largely Beyond the Enterprise’s Control....................................................7 Internal Factors - Conditions Effecting the Enterprise’s Overall Performance.........................7COSTS..........................................................................................................................................8BUYERS, USERS.........................................................................................................................8BENEFITS RETURNS..................................................................................................................9HEALTHCARE MARKET..............................................................................................................9 Market Size and Growth:.........................................................................................................9 Consensus: It’s A Complicated Time for Healthcare But It Will Continue To Do OK.............11 Hospital Performance – Plateaus for the Strong; Declines for the Weak..............................11 Hospital Bond Rating Volatility Tracks Financial Performance..............................................12 Mergers & Acquisitions..........................................................................................................12 General – Steep Decline in Activity........................................................................................12 Healthcare – Strategic Buyer’s Market..................................................................................13FUTURE TRENDS......................................................................................................................13 HEALTHCARE.......................................................................................................................14 Top Six Healthcare Challenges Will Intensify........................................................................14 Recession Will Have A Mild Effect On Healthcare.................................................................15 Healthcare Financial Managers Remain Calm......................................................................15 Hospital Affiliations Up...........................................................................................................16VENDORS..................................................................................................................................16OVERSIGHT & INFLUENCE......................................................................................................18 Regulatory..............................................................................................................................18 Associations...........................................................................................................................19Appendix A..................................................................................................................................20 A Primer--Tax-Exempt & Non-Traditional Debt Instruments..................................................20Bibliography................................................................................................................................22

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EXECUTIVE SUMMARY EXECUTIVE SUMMARY

Historically low interest rates, narrow credit spreads, and a flat yield curve that began peaking in 2006 fueled the hospital bond market’s estimated $50 billion performance in 2007. Thus far, in 2008 available information suggests bond market contraction with approximately 100 overall healthcare provider deals having been underwritten, averaging $138 million in size and totaling $14 billion. Despite this plunge from record-setting days to the current financial turmoil, healthcare remains clear-headed and is anticipating its usual challenges intensifying; the effects of the recession on it being mild; low confidence in the bond markets persisting; and increasing opportunities for strategic acquisitions by the strong being a popular strategy.

Those holding the financial reins at hospitals are dealing with many trans-departmental issues leaving little bandwidth to handle the details of transforming their capital positions or handling merger and acquisition activities—enter the financial advisory firm. Working with the board and financial leadership, these advisory firms provide the expertise and finesse to evaluate a hospital’s dynamics and then plan and execute a strategy that gives the funding sources, bond rating services and underwriters a favorable view of a hospital’s credit worthiness. For the median hospital, these firms produce a value of $1.6 million for each 100 basis points in average borrowing costs avoided.

Three of the top five healthcare financial advisory firms are part of larger national firms with the remaining two being growing stand-alone, privately held firms. The leading firm claims twice the number of deals as the next two closest competitors—the fourth and fifth place firms halve this amount again.

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Market Share - Capital Advisory Services[1985-2007 Total Deals Value (Billions $)]

Shattuck Morgan Keegan

5%

Ponder & Co

48%Killarney Group

3%Kaufman Hall

24%Public Financial

Mgmt.

20%

0

10

20

30

40

2002 2003 2004 2005 2006 2007 2008

Total Acute Care Bond Up/Downgrades(Fitch 2008 Report)

410423

523 534 489

0

200

400

600

800

2003 2004 2005 2006 2007 2008

Total Healthcare M&A Deals Trending

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These firms account for an estimated 10% of the total bond underwriting for healthcare provider organizations; tend to be involved in deals that average smaller in size ($54 million verses $138 million for all of healthcare): and have created a twenty-two year collective average of $5.54 billion/yr.

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PROLOGUE PROLOGUE

Since the early 1990s, a hospital’s access to traditional sources of capital--bonds, bank loans, philanthropy and equipment leases--was relatively easy. These debt instruments fueled strategies for healthcare systems to scale up aggressively by buying physician practices, increasing corporate girth through merger and acquisition, cutting deals to grow their integrated delivery networks and investing in the latest revenue producing technology. However, healthcare has been experiencing a tightening on these common funding sources over the last decade that has illuminated a widening gap between hospitals in strong financial health and those who are not. The effects of this trend include:

The total amount and mix of capital accessed from traditional sources has dropped—bank loans have decreased and leasing has become more popular.

The percentage of hospitals defined as having broad access to capital has declined. Conversely, the percentage of hospitals with limited

access to capital rose more sharply.

Operating margins for both hospital types has also declined—more so for limited-capital-access hospitals.

Much of this movement between these two groupings is attributed to a host of capital-intensive challenges that keep healthcare’s financial landscape in flux. Coupling a mixture of these challenges with the current rocky economy makes it hard to find an acute care enterprise of any substance that has not seen its equity holdings and access to capital suffer. For example, the University of Pittsburgh Medical Center generates approximately $7 billion/yr with a revenue growth of 12% CAGR in revenue during 2003-07.1 Yet despite this track record, it was not able to stop a 99% drop in its investment income during the second half of 2007. 2 This type of drop has not only raised the common concerns about budget, but, more to the point, liquidity issues that add to the challenge of accessing debt instruments to survive and grow the business.

Today, most hospitals are surviving, in part, by trafficking in a plethora of debt instruments (See Appendix A). To remain debt worthy, consensus states that hospitals need to return to the basics by focusing on what matters most to the capital markets—robust cash flow, a strong balance sheet and strong returns from capital, quality and safety initiatives. It is also thought that with the future earnings potential of hospitals always being challenged and choices

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Capital-Intensive Challenges

Changing Competitive Landscape Rising Costs of

Delivery Aging Facilities Hospital M&A Alternate Site

Competitors Referring Physician

Relations Declining

Philanthropy

IT Requirements Major Legacy

Upgrades EMR & Clinical

Systems Siloed Systems

Integration Compliance (SOX,

HIPAA)

Employee Issues High Turnover Rates Limited Skilled

Talent Pool

Reimbursement Pressures Uninsured Declining

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for accessing capital becoming more sophisticated, the need for guidance to negotiate a tortuous list of options will exist. This report will focus on financial advisory services that help acute care enterprises prepare for and manage access capital funding sources.

OVERALL DESCRIPTION OVERALL DESCRIPTION

Financial advisory firms and practices that are focused on helping health systems access capital typically provide expertise and services that include:

Planning for Capital Access: Define financing goals and needs Analysis of current credit and debt capacity Risk analysis and articulation Staging for market conditions Develop a clear understanding of the financial strategy with the board

Transaction Implementation: Provide detailed knowledge of financial products to be used Negotiate fees and interest rates to pay underwriters Complete appropriate legal and credit documentation and filings

Continuing Surveillance: Monitor for developments in financial products markets; e.g. security provisions, interest

rates and regulatory requirements Monitor for opportunities to reduce interest costs or turn a profit like terminating a swap

Derivative Services: Advise and negotiate structure, terms and financing on exchanging one type of debt

instruments (e.g. fixed interest payments) for another type (e.g. floating interest payments) FAS 133 Reporting: the standard for financial reporting of derivatives and hedging

transactions since 2001

Investment Management Services: Act as an independent investment advisor to manage funds that include:

Project or construction funds Reserved funds for debt service General corporate funds Board-designated funds

Merger & Acquisition Services: Provide oversight and management for all steps of the acquisition and divestiture process Value healthcare assets Negotiate the terms and conditions of buying or selling of business assets

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Implementation – Strategy & Posture Implementation – Strategy & Posture

Overall, the funding sources, bond rating services and underwriters want to see that hospital management and the board have a clear strategy. The advisory firm must assure that in planning a strategy numerous external and internal dynamics are evaluated including: 3

External Factors - Largely Beyond the Enterprise’s ControlExternal Factors - Largely Beyond the Enterprise’s Control

Reimbursement for Services: Tightening reimbursement continuing for the foreseeable future Quality-based pay-for-performance requirements negatively impacting payment

“Graying of America”: Demographics of Americans ages 65 and older will increase by 19 million between 2000 and

2020—how will the hospital handle the volume?

Regulation: Increased scrutiny of tax-exempt status and community benefit Increased transparency through stricter reporting requirements

Consumerism: Health care consumers want access to high-quality care at reasonable costs Hospitals will need to invest in meeting the market’s needs or loose share

Internal Factors - Conditions Effecting the Enterprise’s Overall Internal Factors - Conditions Effecting the Enterprise’s Overall PerformancePerformance

Operating Performance: Costs, margins, bad debt, accounts receivable, financial ratios, plant condition and other

incomes are among the metrics used to assess financial strength, performance and liquidity of the enterprise.

Competitive Posture: Market share, competing hospital services, patient volume, community perception and

breadth of services are used to assess an enterprise’s attractiveness to a patient population and ability to capture share.

The demographic fit with offered services and strength of the local economy assesses growth potential over the long term.

. Governance & Leadership Pivotal to organizational performance is planning for executive succession; board

composition and involvement; and oversight and accountability of leadership coupled with long-term strategic, financial and capital planning.

Reimbursement Mix: The percentage of patients covered by state, federal and commercial insurers and the

breakout for managed care, co-pay, self-pay and uninsured care offers insight to revenue source and planning for leaner future reimbursement.

Physician alignment

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Number of physicians, their specialties, certifications, general satisfaction and aging indicates the strength of the hospital-physician relationship.

Hospital must have planning to balance physician needs with the communities to offset contraction in reimbursement and expansion of physician ventures that preempt hospital revenues.

The end result of this planning is the creation of a favorable credit worthiness profile for the funding sources that includes leading bond rating services (Fitch, Moody’s, Standard & Poor’s). These ratings rank the likelihood of hospitals to default on a bond issue; provides guidance on the level of risk associated with investing in the hospital; or facilitates the ability of hospitals to access the debt market—the higher the rating the lower the cost of capital.

COSTS COSTS

Total costs are dependent on duration and extend of services or a percent of total bond transactions. A basic costing may look like:4

Financial Advisor (based on bond size):$2- $4 Million $20,000$4- $7 Million $36,000$7- $10 Million $50,000

Issuer: Fee On All Bonds: 0.25%

BUYERS, USERS BUYERS, USERS

The ultimate buyer of Financial Advisory Services is the Board of Directors for the acute care enterprise. The board is typical composed of relevant stakeholders, such as the medical staff and those from the community, and represents different skill sets critical to the hospital’s success. This general composition of the board means that there will be varying competencies about accessing capital through a variety of debt instruments. To compensate for this, the formation of a Financing Committee is typical and includes board members with knowledge of capital financing and key hospital personnel that includes the CFO and CEO. The overall composition of the board is of utmost importance due to bond-rating agencies (Fitch, Moody’s) increasing their examination of the board’s composition more closely. A board that has the correct balance of knowledge and experience to achieve the financing mission garners a more favorable evaluation and thus, positively effects bond ratings.

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Board Member Experience Criteria

11%

13%

15%

19%

26%

31%

33%

49%

63%

26%

Conflict Mgmt.

Clinical Practice

Fund Raising

Safety & Quality.

Other Boards

Quality Mgmt.

Academic Training

Public Relations

Strategic Planning

Financial & Business

“We want to make sure that management and the board have a clear strategy that runs out for five to 10 years.”

Jeff Schaub

http://www.iag.co/

Finally, the size of the healthcare organization matters. With payer and case mixes being similar, those organizations with more than $2 billion in revenue typically perform better than smaller organizations. This stronger profile makes it easier for them to secure funding and typically indicates a more aggressive growth path that would require advisory services. 5

BENEFITS RETURNS BENEFITS RETURNS

The role of those holding the financial reins of a hospital have changed. As exampled, the CFO used to be focused on balancing the books and achieving some type of revenue. Today, the stakes are much higher. Price transparency, pay for performance, regulatory compliance and quality are blurring operational lines and health systems need a much more diverse person interacting with all departments including those who are actually providing the patient care.

As their reach is extended by these conditions, financial leaders have to expand their knowledge base and resources as well. It is the addition of a financial advisory services that provides the periodically needed bandwidth, transactional expertise and surveillance that speeds access to capital at the lowest cost--failure to do so can become expensive

With today’s higher borrowing costs and complexity of transactions, timing a hospital's borrowing needs and the types of debt it has previously utilized weighed against what’s wise for the hospital now is the basis of all benefits. The simplest of examples tell us for each increase of 100 basis points in average borrowing costs the annual interest expense for the median hospital would increase by $1.6 million.6

HEALTHCARE MARKETHEALTHCARE MARKET

Market Size and Growth:Market Size and Growth:

(NOTE: Due to most firms being privately held and the highly niche nature of this service, publicly available market data on the capital access advisory services market is insufficient to construct estimates that are anything more that rough at best.)

Market Size: The leading top five capital access advisory

firms are involved in an estimated 10% of the total bond underwriting for healthcare provider organizations. The twenty-two year collective average of bond deals completed by

these five firms is $5.54 billion/yr. The top five firms tend to be involved in deals that average smaller in

size ($54 million verses $138 million) than those handled by the large financial bankers. The average deal size was roughly the same among the top five

vendors. The leading firm claims twice the number of deals as the next closest

competitor—the third and fourth place firms halve this amount again.

Market Growth: of 26



0

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40

2002 2003 2004 2005 2006 2007 2008

Total Acute Care Bond Up/Downgrades(Fitch 2008 Report)

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Bond rating agency’s empirical growth projections indicate that, despite healthcare’s general lag in responding to gyrations of the economy, this market will continue to see slowing growth from the highs of early 2007. “Flight to Quality”: The strongest financial performers with the

highest bond ratings will lead the list of those organizations seeking additional funding to grow and modernize their system while those of lesser strength will find funding difficult to attract.

2007 saw a continuation of hospital finance directors taking advantage of historically low interest rates, narrow credit spreads, and a flat yield curve that began peaking in 2006.

The $27.1 billion produced overall by healthcare in the first half of 2007 showed a 40.1% increase over the same period a year earlier most of this growth was in the first quarter.7 Combined issues, which include refundings and new

money, rose 125.2% to $10 billion from 2006's first half.8

Straight new-money issues fell by 3.6% from the 2006 period.9

Refundings increased 70.4% to $6.3 billion compared with the same period in 2006.10

Hospitals issued more than $15 billion of fixed-rate debt verses $11 billion of variable-rate.11

Variable-rate long bonds increased 2,267% from $125 million in 2006 to nearly $3 billion in the first half of 2007.12

Hospital Funding: Up through September 2008, available information

suggests that around 100 overall healthcare bond deals have been underwritten.13 These provider bond deals total $14 billion,

averaging $138 million.14 Banner Health, the largest non-profit system in the

US, closed the largest deal thus far at $917 million.15

Although data is incomplete, the market could slow to half its previous growth spike and size until more favorable liquidity returns.

Leading Hospital Financial Advisory Services: During the 1985 to January 1, 2008, there were 2,270

transactions (103/yr) accounting for $122 billion ($5.54 billion/yr) in funding among the top five identified leading capital access advisory vendors. The average transaction was for $53.7 million.16

VHA’s current vendor Ponder & Co claims the lion’s share with an average forty-six deals per year through 2007.

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October, 2008

... because of the lack of liquidity in the market ...hospitals have been postponing plans to sell new bonds to fund capital improvements such as renovations and new building....

Lisa Martin SVP Moody’s HC

"Hospitals that have been issuers over a long period of time have generally seen that over a 20-year period, the lowest cost of capital has been in variable-rate debt."

Ken Kaufman

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It is anticipated that the severe dislocation in the bond market will presumably ease as government interventions take hold and market confidence returns. However, prudence dictates that, even in the event of effective government intervention, future credit and liquidity facilities from banks to support new issues will be more difficult and more costly to obtain for the near future.

Consensus: It’s A Complicated Time for Healthcare But It Will Consensus: It’s A Complicated Time for Healthcare But It Will Continue To Do OKContinue To Do OK

The agreement over a litany of anticipated negatives precipitating a slowing in healthcare’s bond market activity is matched by a sense of calm about the low impact they will have on the sector.

Most of the last decade found hospitals enjoying a market with high liquidity that easily facilitated borrowing at affordable costs. However, the current financial crisis is producing an emerging consensus about what hospitals can do and expect over the short term:

Many are delaying plans to sell new bonds to fund capital improvements.17

Bad debt will grow due to the weakening economy forcing companies to shift costs in the form of higher deductibles and co-pays or eliminating employee coverage all together.18

The tighter economy and anticipated tax hikes will cause higher-income patients and community supporters to be less inclined to make charitable donations to their local hospital.19

Hospitals that implemented a strategic plan requiring back-end borrowing may be stuck with very large investments that they financed on lines of credit--expecting to refinance these lines is not going to be as easy as before.

Still, top bond-rating agencies see hospitals financial performance in 2008 continuing to stabilize or moderately decline from 2007, despite a weaker economy and negative effects on patient volumes and revenues.20

Hospital Performance – Plateaus for the Strong; Declines for the Hospital Performance – Plateaus for the Strong; Declines for the WeakWeak

Hospitals with high bond ratings are seeing a leveling of financial performance while those with rating of “BBB” or lower are scaling back.

A Sept. 25, 2008 special report by a leading bond rating agency and based on audited financial data from 270 hospitals and systems for fiscal 2007, excluding specialty and those with significant municipal support, found:21

After several years of stable and improving financial performance, acute care hospitals are experiencing a plateau.22

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0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003 2004 2005 2006

% Community Hospitals With Negative Total Margins

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Those with bond rating of “A” or higher are showing the strongest performance, even though there is a slight decline in profitability during 2006-07.23

Most notably is a downward financial performance trend in the lower end of the investment grade bond scale (“BBB” and lower). 24

These enterprises tend to be more volatile due to their smaller size and thus are limited during contracting negotiations due to limited economies of scale. 25 They are also experiencing eroding profitability that is resulting in reduced capital

investments.26

Hospital Bond Rating Volatility Tracks Financial PerformanceHospital Bond Rating Volatility Tracks Financial Performance

The number of upgrades and downgrades are at parity, but look for upgrading—especially for “BBB+” or above rated bonds-- over the next two years.

During the period from 2003 and thus far in 2008, bond volatility (ratings upgrades or downgrades) has shown: 27

“A” rated bonds and higher remained the least volatile showing little tendency to migrate.

“A-” & “BBB+” exhibit a propensity for mildly moving up. “BBB” & “BBB-” are the most active and trend negative,

if they don’t remain neutral. As to the up and down grading trends nine months into 2008, the pendulum has swung back from 2006 when upgrades spiked and exceeded downgrades for the first time.

The number of upgrades and downgrades are currently at parity. 28 Upgrades tend to be for large higher rated

enterprises with improved financial profiles.29

Downgrades are for smaller, lower rated enterprises with eroding profitability and volume losses--increased debt had a small effect.30

Upgrades will likely match or slightly lag downgrades through the next 12 – 24 months.31

Stronger hospitals should fare better by virtue of the characteristics that got them to high ‘A’ or ‘AA’.32

Expect more downgrades than upgrades at lower end of the investment grade rating scale.33

Mergers & Acquisitions Mergers & Acquisitions

The slowing of M&A activity in 2007 resulted in a restructuring that eliminated underperforming and marginally strategic assets to create stronger regional networks.

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Acute Care Bond Downgrade Trend(Fitch 2008 Report)

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Acute Care Bond Upgrade Trend(Fitch 2008 Report)

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General General – Steep Decline in Activity– Steep Decline in Activity

The $1.6 trillion in worldwide M&A activity thus far in the first half of 2008 shows a 36% decline from the record set during the same period a year ago.34 Activity in transactions under $500 million showed

best performance with only an 18% decline and totaling $369 billion.35

As of late July, 2008 only 36% had hope for an improved outlook in the second half of 2008; up from 24% in December 2007.36

HHealthcare – Strategic Buyer’s Marketealthcare – Strategic Buyer’s Market

The implosion of the credit market in midsummer 2008 has prompted a reduction in healthcare M&A activity--especially in those transactions with considerable real estate components. This contraction is seen as producing two key effects:37

Financial buyers have retreated from the market. These buyers seek opportunities to buy organizations and then sell equity assets like real

estate. Strategic buyers, who did not care to compete with

financial buyers and have always accounted for the largest share of acquirers, will take advantage of the current pricing deflation. Hospital pricing in 2007 showed an average price-

to-revenue multiples of 0.74x, down slightly from the 0.75x of 2006, yet above the 2004 measurement of 0.61x.38

Expect some opportunistic activity from the stronger systems while the weaker unload non-strategic assets.

Healthcare’s service sectors M&A advisors enjoyed a bull market from 2003 into 2007. Since then, overall M&A activity declined 8% in 2007 from the record year of 2006.39 Still, the $57 billion spent in 2007 eclipsed all other years with the exception of the $90 billion in 2006.40

More to the point, the 2007 hospital acquisition activity paralleled the activity in the overall M&A market:

58 transactions totaled $8.8 billion and involved 149 hospitals accounting for 22,440 beds; a decrease from the $35 billion in involving 57 transactions involving 249 hospitals and accounting for 54,550 beds in 2006.41

2006 included the largest transaction ever--$33 billion privatization of HCA by a consortium of private equity firms.42

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2007 Healthcare Services M&A Deals

105

13

15

28

41

48

54

58

127

Other Services

Behavorial Health

Rehab

Managed Care

Physician Groups

Home Health Care

Labs, MRI, Dialysis

Hospitals

Long Term Care

410423

523 534 489

0

200

400

600

800

2003 2004 2005 2006 2007 2008

Total Healthcare M&A Deals Trending

“It has taken a long time for the pendulum to swing...the market conditions clearly favor the buyer...”

Jim BeecherPublisher

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FUTURE TRENDS FUTURE TRENDS

As of September 2008, industry observers have noted no evidence of lack of capital available, but have seen the sources of funding shift toward strength and quality--the money is going after deals with big-name companies. The general trends include:43

Lending continues to large, financially sound companies like Siemens or Chevron.

Smaller companies with higher risk are paying higher rates due to their weaker credit status. The large companies with excellent banking relationships and reservoirs of credit are

borrowing and then extending credit to their channels and trading partners.

Municipal bondholders have responded to the crisis with a huge flight to quality—high-grade short-term issues are highly coveted right now.44 Although the yields are up in the long end of the market, 30 years, demand is down and

that is why people are buying short term.

The generation of money through the use collateralized debt obligation by leasing companies has found the current market unreceptive.

HEALTHCARE HEALTHCARE

Top Six Healthcare Challenges Will IntensifyTop Six Healthcare Challenges Will Intensify

One of the more important steps for hospitals to do is establish a formal investor relations programs that include consistent, open and honest communications with Wall Street. These efforts will keep the capital expenditure pipeline open and full as hospitals reconfigure to meet a variety of needs.45 A centerpiece of this program is to answer how hospitals are addressing: Expenditure Control: For Medicare/Medicaid payors, budgetary pressures will hinder rate increases and may lead to restructured payment programs to control costs over the long term.

Healthcare costs for workers and employers will increase by an estimated 5.7% in 2009, the same rate as 2008.46

Decline In Cost Shifting: The commercial payer sector is seeing its ability to shift costs to the insured impeded by flattening prices.

59% of U.S. businesses plan to increase employees’ deductibles, copays or out-of-pocket spending limits.47

Nearly half are encouraging enrollment in high deductible/lower premium health plans.48

19% want to offer a consumer-directed health plan.49

Rising Costs For New Projects: Profitability will be negatively impacted by increasing capital costs from new projects and the rising cost of borrowing.

The Business Physician: As physicians continue to compete with hospitals, alignment strategies with them will ascend to being a top priority.

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Consumerism Rises: Community and patient empowerment will bring demands for investments that foster improved transparency, quality, safety and community benefit.

Uncompensated Care: the current economic slowdown and resulting unemployment is escalating the movement by employers to reduce benefits costs and thus driving up co-pays and deductibles.

The percentage of individuals with employment-based health benefits decreased from 68% in 2000 to 62% in 2006.50

As of September 2008, the nation’s short-term acute care hospitals (STACHs) have reported almost $124 billon in uncompensated care costs over the last five years.51 More than 20% of uncompensated care Medicare cost reports have not complied fully

with reporting requirements.52 Not-for-profit hospitals have 4.8% of uncompensated care costs.53

Recession Will Have A Mild Effect On HealthcareRecession Will Have A Mild Effect On Healthcare

With the exception of credit being tight, a recession lasting through 2009 is anticipated to produce a mild effect on the healthcare sector. The most visible change will be a spike in the health spending/GDP ratio primarily due to a shrinking economy and the costs of providing healthcare growing at 9.6% in 2009; down from 9.9% in 2008.54 A retrospective analysis of the past six recessions to see how a slowing economy might affect healthcare showed:55

The health industry is not as closely linked with the rise and fall of business cycles—it takes at least a one or more years for the effect to show up, if at all.

A medical price [inflation adjusted Medical Consumer Price Index (MCPI)] tends to rise where the general CPI declines usually during or towards the end of a recession.

National Health Expenditures (NHE) and the Net Cost of Private Health Insurance (PHI) do not always fall during a recession. NHE increased during the 1970, 1974, 1980, 2002 recessions and tended to decline

about one or two years after. PHI increased during 1970, 1974, and 2002 but declined during 1980, 1982 and 1990

recessions.

The number of uninsured does not track well with the ebb and flow of a recession—rising with some recessions and sinking with others.56

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$0

$5

$10

$15

$20

$25

$30

2000 2001 2002 2003 2004 2005 2006

Reimbursement Gap: Actual Cost v.s. Medi/Medi Under Payment (billions)

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Healthcare Financial Managers Remain CalmHealthcare Financial Managers Remain Calm

The sub-prime crisis has lead to a near complete disintegration of two bond instruments accessed extensively in the past by hospitals--Auction-Rate Securities (ARS) and the Variable-Rate Demand Bond (VRDB) market. The impact on hospitals has been significant.

Auction-Rate Securities (ARS), no longer a favorite of hospitals, saw a nearly complete destruction thus far in 2008.57 33% to 50% of all hospitals are in the auction rate market and everyone with this type of

debt has had problems--these rates could not possibly be supported for long. 58

Healthcare enterprises with these types of instruments started the process of restructuring to move their debt out of this troubled market to VRDBs, fixed-rate bonds, and other forms of debt in March and April 2008. Some have structured this debt with built in protections; for others, fast rate increases

as high as 17% have been levied. 59 The ARS breakdown spread into the Variable-Rate Demand Bond (VRDB) market in

some specific situations.

Even with this much violent churning in the market, a late September 2008, analysis of healthcare financial manager’s attitude highlighted that they were concerned, but confidently waiting for the waters to calm. Observations included:60

Despite Lehman and Merrill's problems, variable rate bonds trading, popular among hospitals, had barely been affected.

Managers were worried about the interest rates on their bonds, particularly auction-rate debt that have moved up to double-digits.

One of the primary concerns centered on the paper they currently held and the resultant challenge to determine what mix of debt they should carry.

The more financially fit health systems and hospitals trying to acquire smaller ones were not struggling to find financing to do so.

Activity within the private equity investors market continued to be brisk.

Hospital Affiliations UpHospital Affiliations Up

Competitive pressures, tightening reimbursement and the long-term demand for capital has motivated independent community hospitals to affiliate with health systems. In 2007, 56% of hospitals were part of health systems—a 10% rise since 2001.61

VENDORS VENDORS

There any number of financial advisory services that range from large financial bankers to small boutique firms specializing in just one of the services described in this report or a specific industry or niche. However, there are only a handful of full service financial advisory firms strictly focused on capital access for healthcare; most are privately held; many have a strong regional presence. Three of these are on this report’s vendor short list.

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2007 Long Term Municipal New Issues Leading Firms Ranking [(#transactions)/billions]

Source: The Bond Buyer/ Security Data Company

$4.9

$5.5

$5.6

$5.7

$5.9

$8.6

$11.3

$29.3

$43.4

Kelling Northcross (77)

Raymond J ames (5)

Ponder & Co (50)

Morgan Keegan (71)

Lamont Financial (42)

Kaufman Hall (75)

RBC Capital Markets (244)

First Southwest (630)

PFM (625)

http://www.investopedia.com/terms/v/variable_rate_demand_note.asp

http://en.wikipedia.org/wiki/Auction_rate_security



http://en.wikipedia.org/wiki/Auction_rate_security

http://www.iag.co/

Market leaders short list, as ranked by total value of healthcare deals completed for the 1985-2007 periods are:

1. Ponder & Co. 2. Kaufman Hall 3. Public Financial Management 4. Morgan & Keegan (Shattuck)5. Killarney Group

If the total number of deals was the criteria, Public Finance Management and Kaufman Hall would switch rankings.

Notables:1 Ziegler, A. (2008, July 8). Trend: Hospital investment returns still looking shaky. Fiercehealth.com. Retrieved from: http://www.fiercehealthfinance.com/story/hospital-investment-returns-still-looking-shaky/2008-07-08 2 Ziegler, A. (2008, July 8). Trend: Hospital investment returns still looking shaky. Fiercehealth.com. http://www.fiercehealthfinance.com/story/hospital-investment-returns-still-looking-shaky/2008-07-08 3 Presenting your story to capital markets. http://www.hhnmag.com/hhnmag_app/gateFold/pages/JUNE08.jsp 4 http://ida.lacity.org/pdfs/Other/bond_issuance_fees.pdf 5 Clark, R. (2008, May). Size and focus: healthcare provider organizations are beginning to see the benefits of size. Retrieved 10/9/08 from: http://findarticles.com/p/articles/mi_m3257/is_/ai_n25449479 6 (2008, Fall). The Impact of the Capital Markets Crisis and Economic Slowdown on Hospitals and Health Systems. Shattuck Hammond. Retrieved 10-28-08 from: http://www.shattuckhammond.com/Publications/PDFs/CM%20Crisis.pdf 7 Campbell, D. (2007, August 13). As healthcare’s financials peak…. The Bond Buyer Retrieved 10-2908 from: http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17 8 Campbell, D. (2007, August 13). As healthcare’s financials peak…. The Bond Buyer Retrieved 10-2908 from: http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17 9 Campbell, D. (2007, August 13). As healthcare’s financials peak…. The Bond Buyer Retrieved 10-2908 from: http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17 10 Campbell, D. (2007, August 13). As healthcare’s financials peak…. The Bond Buyer Retrieved 10-2908 from: http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17 11 Campbell, D. (2007, August 13). As healthcare’s financials peak…. The Bond Buyer Retrieved 10-2908 from: http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17 12 Campbell, D. (2007, August 13). As healthcare’s financials peak…. The Bond Buyer Retrieved 10-2908 from: http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17 13 Retrieved 10/11/08 from: http://www.ponderco.com/reportsandcommentary/index.php 14 Retrieved 10/11/08 from: http://www.ponderco.com/reportsandcommentary/index.php 15 Retrieved 10/11/08 from: http://www.ponderco.com/reportsandcommentary/index.php 16 Retrieved 10/11/08 from: http://www.ponderco.com/reportsandcommentary/index.php 17 Goldstein, J. (2008, October 1). The Financial Crisis Takes a Toll on Hospitals. Retrieved 10/08 from: http://blogs.wsj.com/health/2008/10/01/the-financial-crisis-takes-a-toll-on-hospitals/ 18 Goldstein, J. (2008, October 1). The Financial Crisis Takes a Toll on Hospitals. Retrieved 10/08 from: http://blogs.wsj.com/health/2008/10/01/the-financial-crisis-takes-a-toll-on-hospitals/

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Market Share - Capital Advisory Services[1985-2007 Total Deals Value (Billions $)]

Shattuck Morgan Keegan

5%

Ponder & Co

48%Killarney Group

3%Kaufman Hall

24%Public Financial

Mgmt.

20%

http://www.killarney-group.com/

http://www.shattuckhammond.com/

http://www.pfm.com/Healthcare_Sector

https://www.kaufmanhall.com/WhatWeDo.aspx

http://www.ponderco.com/dm/cache/documents/Commentary/COMMENTARYweekend10-17-08.pdf

http://blogs.wsj.com/health/2008/10/01/the-financial-crisis-takes-a-toll-on-hospitals/


http://www.ponderco.com/reportsandcommentary/index.php




http://www.bondbuyer.com/article.html?id=20070825MHX4RCTA&queryid=1790584574&hitnum=17












http://www.shattuckhammond.com/Publications/PDFs/CM%20Crisis.pdf

http://findarticles.com/p/articles/mi_m3257/is_/ai_n25449479

http://ida.lacity.org/pdfs/Other/bond_issuance_fees.pdf

http://www.hhnmag.com/hhnmag_app/gateFold/pages/JUNE08.jsp

http://www.fiercehealthfinance.com/story/hospital-investment-returns-still-looking-shaky/2008-07-08

http://www.fiercehealthfinance.com/story/hospital-investment-returns-still-looking-shaky/2008-07-08%20

http://www.fiercehealthfinance.com/story/hospital-investment-returns-still-looking-shaky/2008-07-08%20

http://www.iag.co/

The American Hospital Association (AHA) has endorsed Kaufman Hall. 62

Morgan Keegan(acquired Shattuck Hammond Partners in 2007 for their healthcare focus) been recognized as the top municipal bond underwriter in the South Central United States (Arkansas, Kentucky, Tennessee, Mississippi, Alabama and Louisiana) for fifteen years.63

Market Distribution of VendorsBased on Annual Revenue When Available 1

Vendor Structure and Revenues as available [in millions]

Ponder & Co30 years in business Ranked first in U.S. healthcare finance by dollar volume

Privately held, employee owned

19 Goldstein, J. (2008, October 1). The Financial Crisis Takes a Toll on Hospitals. Retrieved 10/08 from: http://blogs.wsj.com/health/2008/10/01/the-financial-crisis-takes-a-toll-on-hospitals/ 20 Retrieved 10/08 from: http://www.hfma.org/hfmanews/default,month,2008-09.aspx 21 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 22 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/ fitch2008_median_ratios.pdf 23 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 24 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 25 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 26 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/ fitch2008_median_ratios.pdf 27 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 28 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 29 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/ fitch2008_median_ratios.pdf 30 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/ fitch2008_median_ratios.pdf 31 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/ fitch2008_median_ratios.pdf 32 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf 33 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf

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http://www.ponderco.com/

http://www.aha-solutions.org/aha-solutions_app/ControllerServlet?action=displayComponent&componentID=538714079&platformID=144684615

http://www.fitchratings.com/web_content/presentations/2008/healthcare/fitch2008_median_ratios.pdf




































http://www.hfma.org/hfmanews/default,month,2008-09.aspx


http://www.iag.co/

Market Distribution of VendorsBased on Annual Revenue When Available


and number of bond issues over the last 20 years, and have helped raise more than $58 billion of debt capital in 1,021 financing transactions.

Prepared more than 500 capital access plans, debt capacity and asset/liability analyses

Advised on the terms, conditions and price of interest rate swaps for $17 billion in the last two years

34 Barr, G. (2008, July). M&A activity takes hit in first half of 2008. Houston Business Journal. Retrieved 10/08 from: http://houston.bizjournals.com/houston/stories/2008/07/21/daily17.html 35 Barr, G. (2008, July). M&A activity takes hit in first half of 2008. Houston Business Journal. Retrieved 10/08 from: http://houston.bizjournals.com/houston/stories/2008/07/21/daily17.html 36 Barr, G. (2008, July). M&A activity takes hit in first half of 2008. Houston Business Journal. Retrieved 10/08 from: http://houston.bizjournals.com/houston/stories/2008/07/21/daily17.html 37 (2008). The healthcare acquisition report, Levin & Associates. Retrieved 10/08 from: http://www.levinassociates.com/publications/har/har14abstract.pdf38 (2008, March 25). Health Care Services M&A Posts Second-Highest Dollar Level in 2007, According to.../ Reuters. Retrieved 10/08 from: http://www.reuters.com/article/pressRelease/idUS173743+25-Mar-2008+BW20080325 39 (2008, March 25). Health Care Services M&A Posts Second-Highest Dollar Level in 2007, According to.../ Reuters. Retrieved 10/08 from: http://www.reuters.com/article/pressRelease/idUS173743+25-Mar-2008+BW20080325 40 (2008, March 25). Health Care Services M&A Posts Second-Highest Dollar Level in 2007, According to.../ Reuters. Retrieved 10/08 from: http://www.reuters.com/article/pressRelease/idUS173743+25-Mar-2008+BW20080325 41 (2008, March 25). Health Care Services M&A Posts Second-Highest Dollar Level in 2007, According to.../ Reuters. Retrieved 10/08 from: http://www.reuters.com/article/pressRelease/idUS173743+25- Mar-2008+BW20080325 42 (2008, March 25). Health Care Services M&A Posts Second-Highest Dollar Level in 2007, According to.../ Reuters. Retrieved 10/08 from: http://www.reuters.com/article/pressRelease/idUS173743+25- Mar-2008+BW20080325 43 Davis, J. (2008, September 18). Getting the Credit You Deserve: How Will the Credit Crisis Affect IT Spending? Channel Insider. Retrieved 10/08 from: http://blog.channelinsider.com/content001/channel_chatter/post_2.html?kc=EWKNLESP09232008STR2 44 Retrieved 10/08 from: http://www.modernhealthcare.com/apps/pbcs.dll/article?AID=/20080922/REG/809199948&nocache=1 45 (2008, September). 2008 Median Ratios for Nonprofit Hospitals and Health Care Systems. Retrieved 10/08 from: http://www.fitchratings.com/web_content/presentations/2008/healthcare/ fitch2008_median_ratios.pdf 46 Retrieved 10/08 from: http://www.hfma.org/hfmanews/default,month,2008-09.aspx 47 Retrieved 10/08 from: http://www.hfma.org/hfmanews/default,month,2008-09.aspx 48 Retrieved 10/08 from: http://www.hfma.org/hfmanews/default,month,2008-09.aspx 49 Retrieved 10/08 from: http://www.hfma.org/hfmanews/default,month,2008-09.aspx 50 Retrieved 10/08 from: http://www.hfma.org/hfmanews/default,month,2008-09.aspx 51 Retrieved 10/08 from: http://www.hfma.org/hfm/HFM0908_Schuhmann.htm 52 Retrieved 10/08 from: http://www.hfma.org/hfm/HFM0908_Schuhmann.htm 53 Retrieved 10/08 from: http://www.hfma.org/hfm/HFM0908_Schuhmann.htm 54 Retrieved 10/08 from: http://pwchealth.com/cgi-local/hregister.cgi?link=reg/numbers2009.pdf 55 Retrieved 10/08 from: http://pwchealth.com/cgi-local/hregister.cgi?link=reg/numbers2009.pdf 56 Retrieved 10/08 from: http://pwchealth.com/cgi-local/hregister.cgi?link=reg/numbers2009.pdf

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http://pwchealth.com/cgi-local/hregister.cgi?link=reg/numbers2009.pdf



http://www.hfma.org/hfm/HFM0908_Schuhmann.htm












http://www.modernhealthcare.com/apps/pbcs.dll/article?AID=/20080922/REG/809199948&nocache=1


http://blog.channelinsider.com/content001/channel_chatter/post_2.html?kc=EWKNLESP09232008STR2

http://blog.channelinsider.com/content001/channel_chatter/post_2.html

http://blog.channelinsider.com/content001/channel_chatter/post_2.html

http://www.reuters.com/article/pressRelease/idUS173743+25-Mar-2008+BW20080325














http://www.levinassociates.com/publications/har/har14abstract.pdf

http://houston.bizjournals.com/houston/stories/2008/07/21/daily17.html



http://www.iag.co/



100 completed M&A engagements ranging from $4 million to $1.5 billion.

Actively manage a $2 billion portfolio in fixed income investments for clients.

Kaufman Hall Founded 1985 Also offers software suite for planning, in addition to its

consulting services Endorsed by American Hospital Association

Privately held

Public Financial Management Founded 1975 A division of the PFM Group (“PFM”), that includes the

PFM Asset Management LLC Has advised on more than $30 billion of completed

health care transactions since 1990 Claims to have been consistently ranked the nation's

number one financial advisor Very large firm; national presence

Privately held

Morgan Keegan (Shattuch Hammond) Shattuch Hammond acquired by Morgan & Keegan in

2007 Founded1993 160+ M&A transactions totaling $10.8 billion in

transaction value Completed $12.9 billion as underwriter, placement

agent, financial advisor on equity and debt financings

Privately held

57 Retrieved 10/08 from: https://www.kaufmanhall.com/modules/DownloadFile.cfm?DocumentFile=M%3FI%2A0%40K%3E9AF3%3B%21%5C%2A4C%22%22%2FH%2AV%2EHO%5E%3D4%29JL%29H5%3C4X%5C%20LI%2A%5DALZSIHL%3DD%5FYWDO%5E%40%0A%26GK%271HJ%5D%5F%0A 58 Blanchfield. (2005, July). Hospital capital financing in the era of Quality and safety: strategies and Priorities for the future – a survey of Ceos. Robert Wood Foundation. Retrieved 10/08 from: http://www.hret.org/hret/programs/content/rwjreport905.pdf 59 Blanchfield. (2005, July). Hospital capital financing in the era of Quality and safety: strategies and Priorities for the future – a survey of Ceos. Robert Wood Foundation. Retrieved 10/08 from: http://www.hret.org/hret/programs/content/rwjreport905.pdf 60 Retrieved 10/08 from:http://www.modernhealthcare.com/apps/pbcs.dll/article?AID=/20080922/REG/809199948&nocache=1 61 Retrieved 10/08 from: https://www.kaufmanhall.com/modules/DownloadFile.cfm?DocumentFile=M9H%3A%28B%3B%5E%2AMPFC5I%3AG%40%232ZCX%22%3DNL%26%401I%2A%3E%24%29%5DF%21%2CMOQJ2%3BDLNCJHT%5BK%3C%3DBCOJA%0A%25FO%26%2FMJT%20%0A

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http://www.shattuckhammond.com/RecentTransactions/index.shtml

http://www.pfm.com/Healthcare_Sector

https://www.kaufmanhall.com/WhatWeDo.aspx

https://www.kaufmanhall.com/modules/DownloadFile.cfm?DocumentFile=M9H%3A(B%3B%5E*MPFC5I%3AG@%232ZCX%22%3DNL%26@1I*%3E$)%5DF!%2CMOQJ2%3BDLNCJHT%5BK%3C%3DBCOJA%0A%25FO%26%2FMJT%20%0A





http://www.hret.org/hret/programs/content/rwjreport905.pdf

http://www.hret.org/hret/programs/content/rwjreport905.pdf

https://www.kaufmanhall.com/modules/DownloadFile.cfm?DocumentFile=M%3FI*0@K%3E9AF3%3B!%5C*4C%22%22%2FH*V.HO%5E%3D4)JL)H5%3C4X%5C%20LI*%5DALZSIHL%3DD_YWDO%5E@%0A%26GK'1HJ%5D_%0A



http://www.iag.co/



Served as competitive bid agent on interest rate swaps and reinvestment contracts totaling $3.4 billion

Remarketing agent for variable rate issues of approximately $500 million

Killarney Group Founded 1995 Small shop

Privately held

OVERSIGHT & INFLUENCE OVERSIGHT & INFLUENCE

Regulatory Regulatory

U.S. Securities and Exchange Commission (SEC)’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The laws and rules that the SEC enforces governs the securities industry in the US and are based on the concept that all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.

The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing and protecting against fraud.

The most recent and notable SEC laws are the Sarbanes-Oxley Act of 2002. This legislation mandated reforms that enhanced corporate responsibility, improved financial disclosures and combated corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. Direct impact on hospitals and capital access includes hospitals posturing for bond rating agencies by forming audit committees, in addition to finance committees in preparation for to questions like: 64

Does the board have a separate audit committee; what’s its role? Has the hospital or health system adopted a code of conduct or code of ethics or whistle-

blower policy that allows for anonymous submission of complaints regarding accounting, internal controls and financial matters?

Does the hospital’s auditor routinely recommend audit adjustments? Are they reviewed by the board?

Which officers certify the financial statements?

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http://www.sec.gov/spotlight/sarbanes-oxley.htm

http://www.sec.gov/about.shtml

http://www.killarney-group.com/

http://www.iag.co/

AAssociationsssociations

The Securities Industry and Financial Markets Association (SIFMA) and its Investing in Bonds provides a regulatory voice and information services to its 650 member firms. National Council of Health Facilities Finance Authority focuses on issues that raise the availability of tax-exempt financing for healthcare facilities. This Council represents the member authorities that are the tax-exempt bond issuers and does not represent specific hospitals or healthcare systems. Since 1990, NCHFFA members have issued over $50 billion of healthcare bonds.

62 Retrieved 10/08 from: http://www.aha-solutions.org/aha-solutions_app/ControllerServlet?action=displayComponent&componentID=538714079&platformID=144684615 63 (2008, January 8). Morgan Keegan is Again Top Ranked Municipal Bond Underwriter in Six-State Region... Reuters. Retrieved 10/08 from: http://www.reuters.com/article/pressRelease/idUS247430+08-Jan-2008+BW2008010864 The board’s role in capital financing. H&HN. Retrieved 10/08 from: http://www.hhnmag.com/hhnmag/gateFold/PDF/06_2007/6.07_hhn_gate.pdf

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http://www.nchffa.com/Our%20Mission.htm

http://www.investinginbonds.com/

http://www.sifma.org/capital_markets/primary.shtml

http://www.hhnmag.com/hhnmag/gateFold/PDF/06_2007/6.07_hhn_gate.pdf

http://www.reuters.com/article/pressRelease/idUS247430+08-Jan-2008+BW20080108



http://www.iag.co/

Appendix AAppendix A

A Primer--Tax-Exempt & Non-Traditional Debt InstrumentsA Primer--Tax-Exempt & Non-Traditional Debt Instruments

Of these methods access to capital in the form of tax-exempt bond offerings and non-traditional vehicles are the most common and include:

Bond Offerings: Most common are publicly offered tax-exempt bonds with fixed or variable rates are sold on the open market by an underwriter. Fixed Rate Bonds: Typically a 30-year term to

maturity with the rate based on the credit rating of the borrower or credit enhancements like bond insurance.

Variable Rate Bonds: Unless a crediting rating of AA/Aa or higher and a highly liquid financial posture can be demonstrated, a letter of credit or bond insurance from a bank is usually required of the borrower. Term to maturity is shorter; can vary from daily to multi-year; and can be structured more commonly as: Auction Rate Securities: These debt instruments

are typically corporate or municipal bonds that use a Dutch auction (seller and buyer demand is used to set the interest rate) to reset the interest on a regular basis. Preferred stock that uses this same process to set the dividend also falls into this category.

Tax-exempt hospital and health system issuers make up approximately 25% of the auction-rate market.65

Demand Bonds: The borrowed funds are payable upon demand by the lender; charged interest is typically based on prevailing money market rates, like the prime rate.

Put Bonds: Also known as a multi-maturity bond, option tender bond or variable rate demand obligation give the bondholder the option of requiring the bond issuer to repurchase this security at specified dates before maturity. This may happen either once during the lifetime of the bond (known as a one-time put bond), or on a number of different dates. Of course, the special advantages of put bonds mean that some yield must be sacrificed.

Commercial Paper: An unsecured short-term debt instrument that is typically issued by a corporation to finance accounts receivable, inventories or other short-term liabilities. The debt is usually issued at discounted prevailing market interest rates;

65 Retrieved 10/08 from: https://www.kaufmanhall.com/modules/DownloadFile.cfm?DocumentFile=M%3FI%2A0%40K%3E9AF3%3B%21%5C%2A4C%22%22%2FH%2AV%2EHO%5E%3D4%29JL%29H5%3C4X%5C%20LI%2A%5DALZSIHL%3DD%5FYWDO%5E%40%0A%26GK%271HJ%5D%5F%0A

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Four Key Ways Not-for-profit (NFP) Access

Capital

Self -Generation: Operational cash reserves and flow are raised by a net increase in revenues while dropping costs.

Disposal of Assets: Divestiture of nonproductive assets or non-core assets—like real estate—can yield capital and improve financial performance.

Philanthropy: More mainstream than in past periods, donations of “time, talent or treasure” is part of every healthcare financial profile.

External Capital

http://www.investopedia.com/terms/v/variable_rate_demand_note.asp#%23




http://en.wikipedia.org/wiki/Dividend

http://en.wikipedia.org/wiki/Dutch_auction

http://www.iag.co/

only corporations with high-quality debt ratings will find buyers easily without having to offer a substantial discount. It does not need to be registered with the Securities and Exchange Commission (SEC) if matures before nine months—a major inducement to use.

FHA Financing: Gaining some popularity recently, this is essentially a form of public offering by the U.S. Department of Housing and Urban Development (HUD). FHA Section 242 loans are insured and offered to acute care hospitals to finance

constructions, remodeling, expansions or refinancing. It is usually a fixed rate for a term of up to 25 years from the end of construction with

variable rate swap structures often being a consideration.

Private Placement: Raising capital via private placement is the product of selling securities to a small number of investors such as pension or mutual funds, banks or insurance companies. It can take the form of leases, loans, notes, or bonds; be taxable or tax-exempt; and

have fixed or variable interest rates. Because of the limited number of investors, public disclosure of detailed financials, the

need for a prospectus and registration with the Securities and Exchange Commission (SEC) is waved.

Nontraditional Offerings: These offerings are post 1990s when not-for-profit tax-exempt financing was the rule of the day. Today, non-traditionals most frequently come in the form of:

Off-Balance-Sheet (OBS) Options: By using a method of reclassifying financing, large capital expenditures are kept off of a company's balance sheet. Joint ventures, partnerships focused on research and development, and operating

leases (one of the most common forms for capital equipment).

Real Estate Investment Trusts (REITs): These are essentially third party ownership of the real estate that is formed to monetize the hospitals assets by selling securities on the major exchanges. REITs have increasingly partnered with physician groups and other health care

enterprises to selectively develop and manage medical properties like medical office buildings, specialty hospitals, outpatient and ambulatory treatment and diagnostic clinics.

Accounts Receivable Financing: A form of asset-financing where an enterprise sells or uses its receivables--money owed by patients—in an amount that is reduced in value based on the length of time the money has not been paid (“ageing”).

Subordinated Securities: These are lower-rated classes of securities that bear higher interest rates. They are sold to other investors or, in the case of securitization deals, held by the originator. In the event of problems, the higher-rated (senior) securities receive payments prior to

the subordinated ones.

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http://www.iag.co/

BibliographyBibliography

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http://www.iag.co/

financial and bond services for hospital market

Health & Medicine