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Transforming health care through research and education.

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Credit Crisis and the Board

In December 2008, responding to the need for information about how hospitals are dealing with the current credit crisis, the Health Research & Educational Trust and the Center for Healthcare Governance surveyed 258 hospital and health system CEOs about their board's activities in the areas of risk management and oversight. The survey focused on the types of risk analysis done by the board, the board's activities in evaluating and monitoring financial risk, the board's responses to potential increases in financial risk, and the importance of an organization's overall risk level in its strategic planning.

Types of Risk Analysis

Not surprisingly given the current credit crisis, risk associated with capital was the area where the largest group of respondents indicated that their boards conduct a regular and comprehensive risk analysis. Reputation or brand risk was also identified by a majority of respondents as an area for which boards perform such an analysis.

does your board conduct regular and comprehesive risk analysis on the following items? 79% indicated risk associated with capital, 53%indicated reputation/brand risk, 33% indicated physician flight and 28% indicated errant employee behavior

Hospitals with more than 100 beds were more likely to do a regular risk analysis of risk associated with capital, reputation and brand, and physician flight, and hospitals with fewer than 100 beds were more likely to do a regular analysis of errant employee behavior risk.

Monitoring of Risk

A majority of respondents indicated that in the past 12 months their board meeting agendas had included the finance-related topics of bond ratings and their implications, understanding debt servicing, and bond covenants and the implication of not meeting them. About one third of respondents indicated that their board meeting agendas had included the topic of how to take advantage of interest rates.

Has Your Board Meeting Agenda Included the
Following Items Over the Past 12 Months
Bond ratings and their implications 62%
Understanding debt servicing 59%
Bond covenants and the implication of not meeting them 54%
How to take advantage of interest rates 32%

 

Urban hospitals and hospitals with more than 100 beds were more likely to include these agenda items than were rural hospitals and hospitals with fewer than 100 beds.

Most respondents indicated that their board meetings had addressed future capital access risk and interest rate volatility risk in the past 12 months. In contrast, only 15% of respondents indicated that their board meetings had addressed tax risk.

how many board meetings address following risks over 12 month period: 84% include future capital risk, 62% include interest rate volatility, 15% include tax risk

Urban hospitals were more likely to address these risks in their board meetings than were suburban or rural hospitals.

Evaluation of Risk

A large majority (90%) of respondents indicated that their boards had examined or reviewed management action plans that address the long-term financial viability of the organization in the past 12 months. The number of beds a hospital has was positively correlated with the likelihood that its board conducted such a review. In addition, urban and suburban hospitals, systems, and subsidiaries of system boards were more likely to have performed this function than were rural and freestanding (ie.,nonsystem) hospital boards.

Most respondents indicated that their boards regularly evaluate their organization's amount of debt outstanding, debt service coverage ratio, cost of capital, and cash-to-debt ratio. A smaller majority of respondents also indicated that their boards regularly evaluate debt-to-cash flow ratio and debt-to-capitalization ratio.

 

Which of the Following Financial Indicators
Does Your Board Regularly Evaluate
Amount of Debt Outstanding 83%
Debt Service Coverage Ratio 70%
The Cost of Capital 66%
Cash-to-Debt Ratio 66%
Debt-to-Cash Flow Ratio 58%
Debt-to-Capitalization Ratio 53%

 

Overall, the boards of urban hospitals and hospitals with more than 100 beds were more likely evaluate these financial metrics than were the boards of rural hospitals and hospitals with fewer than 100 beds.

Responses to Risk

More than half (55%) of respondents indicated that their boards had discussed refocusing corporate resources to "core" business and diverting resources from noncore and unprofitable enterprises over the past 12 months. Systems and hospitals with more than 300 beds were more likely to consider these options at the board level than were freestanding hospitals and hospitals with fewer than 300 beds.

In addition, over the past 12 months, a majority of respondents indicated that their boards had taken action by discussing capital prioritization and modifying their strategic capital plan. In addition, almost one third of respondents indicated that their board had developed contingency plans in relation to major capital projects or had considered selling a noncore property (i.e., real estate) or other noncore assets (e.g., health plans, SNFs). Almost one quarter of respondents indicated that their board had actively considered mergers and/or acquisitions.

 

Which of the Following Board Actions
Have Taken Place in the Past 12 Months?
The board has undertaken capital prioritization discussions. 75%
The board has modified the strategic capital plan. 60%
The board has developed contingency plans in relation to major capital projects. 32%
The board has considered selling noncore property (i.e., real estate) or other noncore assets (e.g., health plans, SNFs). 31%
The board has actively considered meregers and/or acquistions. 24%

Overall, boards of hospitals with more than 100 beds were more likely to take such actions.

Risk and Strategic Planning

Almost four of every five respondents (79%) indicated that their organization's total risk level is a consideration when considering strategic direction.  Most of those indicated that the full board and the full executive team are involved in making strategic decisions that consider total risk level. Around one third of these respondents also indicated that at least one board committee is involved in making such decisions.

who is involved in making strategic decisions that consider the total risk level? 73% full board, 68% full executive team, 34% at least one board committee

Overall, the size and location of the hospital was correlated with the question of which group looks at the total risk level when considering strategic direction. Smaller, rural hospitals were more likely to delegate that discussion to the full board; larger, non-rural hospitals, to committee(s), perhaps because of either a more robust committee structure or the size of the board. In addition, the involvement of the full executive team in these strategic decisions was positively correlated with the number of beds in the hospital.

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