Hitting the Reset Button – The Sequel

3 minute
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In last year’s blog, Hitting the Reset Button, we discussed a new approach to the traditional rating agency presentation given the financial challenges that many were experiencing during 2022. We advised two primary strategies. First, that management teams bring the financial discussion to the front of the presentation and outline the immediate steps being taken to stabilize results, preserve liquidity, and make the covenants. Mission, vision and long-term strategies, could wait to the end of the discussion in light of the financial challenges.

Secondly, we advised that hospitals quantify their improvement initiatives. Forward-looking information, even if only a single-year budget, or a point of view on the trajectory of financial results, was important due to unpredictable volumes and runaway labor costs. This suggestion still holds true. A forward view, even if a trajectory of future performance, is integral to the rating committee. If a hospital does not include any forward-looking information, the rating analysts will make their own assumptions about near-term results. Often this includes annualizing quarterly results, which will not include any benefits from performance improvement initiatives.

So, what do you present this year, when you must provide the rating agencies with an update on how the plan is going?

You unabashedly provide them with an update on how it’s going, with detail and unabridged transparency. The good, the bad, and certainly, the uncertain.

If the hospital or health system is tracking to plan, show that in slides that compare last year’s financial forecast to this year’s actual. Rating agencies (still) love waterfalls, so show with a waterfall slide how you got from point A to point B. Outline the major categories (such as volumes, rates, labor costs) that allowed you to reach or even exceed the plan. Outline what strategies management will apply in the coming year with a nod toward the quality of earnings (durable versus one-time).

If financial results are not going as expected, chronicle why that is. Begin with where the organization hit its marks but acknowledge and explain the misses. Waterfalls that compare budget versus actual are effective here, too.

The mid-course corrections and the speed in which the hospital made the corrections are important because they express urgency. One of the more effective slides in a recent rating presentation showed a timeline by month of how an executive team and board reached a major decision quickly. The hospital was financially struggling and needed to take actions to contain the losses. In this case, the team made the decision within a short six months. The slide showed the monthly milestones of data gathering, data analytics, and accelerating the decision. The timeline also displayed the finance committee and full board meetings over the six months so the analysts could see the solid coordination between management and governance. I guarantee you that slide went into rating committee and went over well.

While financial performance may absorb much of this year’s meeting agenda again, the analysts will want an update on longer-term strategies. Consider a slide with a headline such as “Since We Met Last Year” or “Update on Strategic Initiatives” that crisply outlines progress made on strategies discussed at the prior meeting.

To prepare for a meeting, the first thing an analyst will do is re-read the last rating report, including the rating triggers. The analysts will pull out last year’s presentation and review. They will study the latest audit and annual operating information, as well as the most recent quarterly financial statements and any news about the organization in the public domain. They will review the meeting notes from the last meeting. They will speak to other ratings analysts who cover competing providers, related universities (in the case of academic medical centers), local municipals (for any economic developments such as new employers, property tax changes, or population trends), and state analysts for any policy developments (such as pricing regulation or Medicaid budgets). They will compute the key ratios, comparing them to recent historical performance, budget expectations, and medians.

Management should read the most recent rating agency report on their organization to re-familiarize themselves with the events or scenarios that could lead to an upgrade or downgrade. These events encapsulated the sentiments of the rating committee; you have a direct view right into the rating committee itself.

Know that the rating analysts will be well prepared with their list of questions, ready to understand how the plan is progressing or if in need of a new direction. Maintaining the same sense of urgency and focus on the bottom line will be important in this year’s presentations as well.

In fiction, the reset button technique allows characters to return to the status quo that existed before a major change was introduced. Healthcare may not return to its previous, pre-pandemic state, but there are promising signs in our recent National Hospital Flash Reports that conditions may be stabilizing. Tell the story of how your organization is resetting to adapt to a new status quo.

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Lisa Goldstein is a nationally recognized analyst, speaker, writer, and expert on not-for-profit healthcare. At Kaufman Hall, she is a member of the Treasury and Capital Markets practice and Thought Leadership team.
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