With his 7-foot-1 frame and 275 muscled pounds, Wilt Chamberlain was a dominant force in the game of basketball, but he wasn't beloved. As he famously lamented, "Nobody roots for Goliath."

The late Chamberlain was probably right about basketball fans, but not hospital bondholders. They seem to love the Goliaths of the industry. They lavish Goliath-like hospitals and healthcare systems with credit on agreeable terms. They root for them because they are big and strong and repay their loans.

When it comes to the hospital-lending parable, few Davids hear cheers. While many smaller hospitals may have the pluck of their biblical counterpart, these facilities often lack the financial slingshot necessary to conquer the capital markets. For many hospital Davids, it takes the assistance of a Goliath-either a larger system or a federal loan guarantee-to borrow money at attractive rates.

Size relative to location

Davids and Goliaths don't break down neatly into rural hospitals and urban hospitals, says David Cyganowski, co-head of not-for-profit healthcare investment banking at Citigroup. A 100-bed, stand-alone hospital in an urban market is a David. So is a 30-bed rural hospital that can't stem out-migration. But a decent-sized rural hospital, with 90 to 150 beds, that has dominant local market share has "ample access to capital markets," Cyganowski says.

"If you've got a 25-bed hospital in rural America, yes, they're going to have a lot of trouble" finding lenders, Cyganowski says, but no more than a smaller urban hospital facing ferocious competition from other hospitals and physicians.

Randy Fuller, hospital segment manager for GE Healthcare Financial Services, agrees that size is a key factor. Size "is an indication of stability," says Fuller, one of the authors of the Financing the Future series of reports sponsored by the Healthcare Financial Management Association. "It just becomes that much more difficult if you are a small facility, because just one mistake can be devastating to your results."

The first report in the series showed that in 2001 hospitals with fewer than 100 beds made up 56% of the total number of hospitals, but only 50% of the number of hospitals were considered to have broad access to capital. Hospitals with 100 to 399 beds accounted for the difference, making up 41% of the total but 46% of the broad-access category. Hospitals with 400 or more beds made up 4% of the total hospitals studied and also 4% of the broad-access category, so they are represented in the broad-access category in proportion to their numbers overall.

At the same time, both Cyganowski and Fuller point to other factors that are at least as important as size.

Any prospective borrower is first judged on the financial fundamentals that lenders tend to rely on, such as operating performance, current debt outstanding relative to earnings and cash on hand, and past history.

Fuller, echoing the first of the planned six Financing the Future reports, says location is a major factor. The first report in the series said certain states, such as New York, Hawaii and Mississippi, have a high percentage of hospitals with limited access to capital, relative to other states. The report says state-specific issues, such as certificate-of-need laws, other regulations, Medicaid reimbursements and unionization explain most of the discrepancies among states.

The approach a hospital or healthcare system takes to investor relations is also critical, not only in determining which facility is able to sell bonds but at what rates and on what terms, Cyganowski says.

The most recent report in the Financing the Future series, released last week, suggests that chief financial officers are counting on operations to produce enough cash to cover a growing share of their organization's capital needs.

Flexing some muscle

Catholic Healthcare West is a 41-hospital Goliath. Last month, the San Francisco-based system lined up a total of $1.4 billion in a variety of debt instruments, says Michael Blaszyk, executive vice president and chief financial officer. The instruments included $700 million in debt refinancing, $300 million in new bonds for expansion plans, a $150 million revolving loan pool for equipment and a $250 million letter of credit with a group of banks.

"Size does help," Blaszyk says. "I think more and more, you will find it difficult for stand-alone or small systems that don't seem to have a concentrated strategy, (they) will have a more difficult time going to the market and will pay higher interest rates. I would add a caution here: While I think size is a factor, you have to have a cogent strategy."

Blaszyk's experience at CHW bears that out. He was the first executive hired by Lloyd Dean, the system's president and chief executive officer, when Dean took the helm in 2000. When Dean and Blaszyk went to work, CHW was "deeply troubled" financially, Blaszyk says. The financial losses that the system was sustaining in the late 1990s led to the resignation of former CEO Richard Kramer and the turnaround effort initiated by Dean, Blaszyk and other executives (Feb. 12, 2001, p. 4). "We made the decision at that point," Blaszyk says, "that we would not be back in the market" any time soon.

Having met or exceeded its financial targets for better than three years, Blaszyk says, CHW has the credibility to borrow again. Asked for an example of how far CHW has come, Blaszyk cited a $250 million, three-year letter of credit arranged in April. The banks guaranteeing the letter did not require CHW to put up any collateral, he says, whereas the system had to post collateral for a $150 million letter of credit in 2002.

Cyganowski says CHW is a great example of a system that understood how to tell its story persuasively. It's a cost-cutting turnaround story, a four-year shift from hundreds of millions in losses to $50.7 million in earnings in the year ended June 30, 2003, CHW's first fiscal year in the black since 1996. As a result, even though the system has a BBB rating, he says, "They priced like a strong A credit" last month in the bond market.

St. Rita's Medical Center in Lima, Ohio, a 375-bed facility, is not a Goliath, but Cincinnati-based Catholic Healthcare Partners, the system that owns St. Rita's, certainly is. CHP will finance about $86 million of a $130 million expansion project at the hospital with tax-exempt bonds it sold in December 2002.

"It speaks for why you have systems and size," says Bill Shuttleworth, CFO of the system, which has 27 hospitals in four states.

Texas-sized sophistication

Texas Health Resources isn't the size of CHW or CHP, but it's still big enough to qualify as a Goliath. The 13-hospital system sold $300 million in bonds in May 2003 to partially fund eight projects planned over an eight-year period.

THR split its bonds into two categories: short- term and really short-term, says Ron Bourland, the system's executive vice president and CFO. Every five weeks, THR retires $150 million in 35-day bonds by selling $150 million in new, 35-day bonds. And every seven days, THR completes the same rollover with $150 million in seven-day bonds. All of the bonds are also fully insured.

The short-term credit is available to a large, stable system such as THR, especially because it operates in a good rate-setting environment in Texas, home to all 13 of its hospitals, Bourland says. "In Texas, there are virtually no external or governmental or other factors restricting rate increases," he says. "They're generally arm's-length negotiations between hospitals and health insurers." For instance, there is no governmental review of rates after they are negotiated, he says.

"As a result of using variable-rate bonds, the average interest rate since the bonds have been issued has been between 1% and 1.25%," Bourland says. "We currently have an additional $700 million in long-range bonds outstanding at about 5%, so you can see the difference in using the variable-rate vehicle."

"Investors are becoming more discriminating (toward) lower credits or less competitive systems or locations," Bourland says. "In our case, for example, we are a large system, we are in a relatively growing, stable part of the country, we have a large market share and we have better-than-industry margins."

Not-for-profit healthcare has reached this level of sophistication only in the past two or three years, Cyganowski says. "The treasury function of (not-for-profit) healthcare (now) mirrors that of corporate America," he says.

Children's Healthcare of Atlanta may be a David relative to the larger local hospital systems, but it's the Goliath of pediatric care in Atlanta. Formed by the 1998 merger of Egleston Children's Hospital and Scottish Rite Children's Medical Center, 388-bed, two-campus Children's Healthcare is benefiting from other Atlanta hospitals shifting their resources from pediatric to adult services, CFO Ruth Fowler says.

Children's has plans to spend $344 million on renovations and expansions at its two hospitals, and Fowler says she expects the system to finance $200 million to $220 million of that total. The system is at least 90 to 120 days from entering the bond market-it is still working through Georgia's certificate-of-need process-but already Fowler senses that Children's will be well-received by investors. Children's executives have focused on wringing cost out of the system and improving operations, while demand for pediatric services is growing.

Hope for the Davids

Aligning with a Goliath can be a highly effective strategy for a David to gain access to financing, says Lewis Redd, national healthcare practice leader for the recently renamed Capgemini healthcare consultancy.

Vendors are increasingly helping the Davids finance large equipment purchases, Lewis says. Long associated with GE Capital, the strategy has been picked up in the past few years by companies such as IBM, he adds.

Larger hospital systems can play the friendly Goliath role, too, even in a relationship that is far short of a merger or acquisition, Lewis says. For instance, Mission Hospitals in Asheville, N.C., has an alliance with up to two dozen smaller hospitals throughout western North Carolina, he says. The smaller hospitals receive information technology and other services from Mission Hospitals and in return the facilities refer patients to Mission Hospitals.

That alliance, known as the Western North Carolina Health Network, includes 14 hospitals that discuss just about everything about the business except staff salaries, prices and dividing markets, says Robert Burgin, president and CEO of Mission Hospitals.

Shoshone Medical Center, Kellogg, Idaho, is as David as a hospital gets. The critical-access hospital aligned with the biggest Goliath-the federal government-by securing a federal loan guarantee, enabling it to build a replacement hospital, says Richard Mikkelson, the hospital's CFO until he left recently. Mikkelson previously worked for Shoshone's management company, QHR, a unit of Triad Hospitals.

Shoshone was able to secure an $18 million loan from an out-of-state bank thanks to the federal Department of Housing and Urban Development's loan guarantee program for critical-access hospitals, known as the HUD 242 loan program, Mikkelson says.

Without the HUD loan guarantee, Mikkelson says, "We wouldn't even have thought about" building the 25-bed replacement hospital, which is scheduled to open in April 2005. Mikkelson says the hospital was on the verge of closing when he and CEO Gary Moore arrived six years ago. Converting to critical-access status kept the hospital afloat and the two managers received board approval to apply for the loan guarantee three years ago. (Last week QHR said it terminated Mikkelson in late April for actions that were not related to the loan or building project. See related story, p. 32.)

"We're laying concrete today," Mikkelson said in an interview last month. "I'm watching it as they pour."

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