The market clout of a regional healthcare giant like the 19-hospital University of Pittsburgh Medical Center can create a challenging environment for standalone community hospitals. Pittsburgh’s 376-staffed-bed Jefferson Regional Medical Center, where Robert A. Frank has spent the past three of his 26 years at the hospital as its senior vice president and chief financial officer, is no exception.
But despite UPMC’s long shadow, Jefferson has received two straight outlook upgrades since 2005 from Moody’s Investor’s Service during a turnaround that stretches back to 2002. Moody’s points to improved operating performance and debt reduction, but Frank says his staff’s focus on the agency’s six most important metrics has helped management develop a turnaround strategy.
“Moody’s thought we were too highly leveraged,” says Frank. “Meanwhile, we had an investment portfolio that was throwing off nice earnings but masking that we were losing money from operations.” So senior management decided to focus on operations, rather than borrowing, to fund projects. “We wanted to instill financial discipline in all departments,” Frank says.
Responding to CFOs who wanted clarification about the agency’s criteria, Moody’s released a bulletin on the top six metrics it uses to gauge financial health. But among those six, Moody’s has been paying special attention to a couple.
“We’ve been placing more emphasis on debt to cash flow, rather than debt to capitalization,” says Moody’s Vice President Mimi Park. “It’s a better reflection on an organization’s ability to service their debt obligation from ongoing cash flow.” Park says Moody’s has become increasingly reliant on operating cash-flow margin because it measures profitability without considering fixed costs.
Frank is using the Moody’s upgrades to refinance existing debt for better terms, but operations fund most of Jefferson’s capital expenditures. Meanwhile, Frank noticed another metric garnering rating agencies’ attention: investment in the physical plant. “What I noticed them honing in on was the capital spending ratio,” he says. “You get into a downward cycle if you defer capital spending as a standalone.”—Philip Betbeze