Category Archives: Capital Formation

From Budget Battles to Consumer Backlash: Paul Keckley on the Future of U.S. Health Care

Posted on by • Posted in 2026 Mid Term Election Issues, 2028 Election Issues, Capital Allocation Process, Capital Financing, Capital Formation, Capital Planning, Capital Structure, Consolidation, Consumer Centered Experience, Consumer Culture, Consumer Engagement, Consumer Experience, Consumer Trust, Consumer Value Proposition, Consumer-Centered Care Pathway, Consumer-Centric, Consumerism, Digital Health, Digital Health Initiatives, Health Policy, Healthcare Reform, Innovation, Private Equity, Workforce Challenges, Workforce Crisis, Workforce Issues, Workforce Shortages • Tagged , , , , • Leave a comment

https://strategichcmarketing.com/from-budget-battles-to-consumer-backlash-paul-keckley-on-the-future-of-u-s-health-care/?access_code=667226

The U.S. health care industry is approaching a critical inflection point, according to veteran health care strategist Paul Keckley. In a candid and thought-provoking keynote at the 2025 Healthcare Marketing & Physician Strategies Summit (HMPS) in Orlando, Keckley outlined the challenges and potential opportunities health care leaders must navigate in an era of unprecedented economic uncertainty, regulatory disruption, and consumer discontent.

Drawing on decades of policy experience and his signature candid style, Keckley delivered a sobering yet actionable assessment of where the industry stands and what lies ahead.

Paul Keckley, PhD, health care research and policy expert and managing editor of The Keckley Report

Health care now accounts for a staggering 28 percent of the federal budget, with Medicaid expenditures alone ranging from the low 20s to 34 percent of individual state budgets. Despite its fiscal significance, Keckley points out that health care remains “not really a system, but a collection of independent sectors that cohabit the economy.”

In the article that follows, Keckley warns of a reckoning for those who remain entrenched in legacy assumptions. On the flip side, he notes, “The future is going to be built by those who understand the consumer, embrace transparency, and adapt to the realities of a post-institutional world.”

A Fractured System in a Fractured Economy

Fragmentation complicates any effort to meaningfully address rising costs or care quality. It also heightens the stakes in a political climate marked by what Keckley termed “MAGA, DOGE, and MAHA” factions, shorthand for various ideological forces shaping health care policy under the Trump 2.0 administration.

Meanwhile, macroeconomic conditions are only adding to the strain. At the time of Keckley’s address, the S&P 500 was down 8 percent, the Dow down 10 percent, and inflationary pressures were squeezing both provider margins and household budgets.

“Economic uncertainty is not just about Wall Street,” Keckley warns. “It’s about kitchen-table economics — how households decide between paying for care or paying the cable bill.”

Traditional Forecasting Is Failing

One of Keckley’s key messages was that conventional methods of strategic planning in health care, based on lagging indicators like utilization rates and demographics, are no longer sufficient. Instead, leaders must increasingly look to external forces such as capital markets, regulatory volatility, and consumer behavior.

“Think outside-in,” he urges. “Forces outside health care are shaping its future more than forces within.”

He encourages health systems to go beyond isolated market studies and adopt holistic scenario planning that considers clinical innovation, workforce shifts, AI and tech disruption, and capital availability as interconnected variables.

Affordability and Accountability: The Hospital Reckoning

Keckley pulls no punches in addressing the mounting criticism of hospitals on Capitol Hill, particularly not-for-profit health systems. Public perception is faltering, with hospital pricing increasing faster than other categories in health care and only a third of providers in full compliance with price transparency rules.

“Economic uncertainty is not just about Wall Street. It’s about kitchen-table economics — how households decide between paying for care or paying the cable bill.”

“We have to get honest about trust, transparency, and affordability,” he says. “I’ve been in 11 system strategy sessions this year. Only one even mentioned affordability on their website, and none defined it.”

Keckley also predicts that popular regulatory targets like site-neutral payments, the 340B program, and nonprofit tax exemptions will face intensified scrutiny.

“Hospitals are no longer viewed as sacred institutions,” he says. “They’re being seen as part of the problem, especially by younger, more educated, and more skeptical Americans.”

The Consumer Awakens

Perhaps the most urgent shift Keckley outlines is the redefinition of the health care consumer. “We call them patients,” he says, “but they are consumers. And they are not happy.”

Keckley cites polling data showing that two out of three Americans believe the health care system needs to be rebuilt from the ground up. Roughly 40 percent of U.S. households have at least one unpaid medical bill, with many choosing intentionally not to pay. Among Gen Y and younger households, dissatisfaction is particularly acute.

“[Consumers] expect digital, personalized, seamless experiences — and they don’t understand why health care can’t deliver.”

These consumers aren’t just passive recipients of care; they’re voters, payers, and critics. With 14 percent of health care spending now coming directly from households, Keckley argues, health systems must engage consumers with the same sophistication that retail and tech companies use.

“They expect digital, personalized, seamless experiences — and they don’t understand why health care can’t deliver.”

Tech Disruption Is Real

Keckley underscores the transformative potential of AI and emerging clinical technologies, noting that in the next five years, more than 60 GLP-1-like therapeutic innovations could come to market. But the deeper disruption, he warns, is likely to come from outside the traditional industry.

Citing his own son’s work at Microsoft, Keckley envisions a future where a consumer’s smartphone, not a provider or insurer, is the true hub of health information. “Health care data will be consumer-controlled. That’s where this is headed.”

The takeaway for providers: Embrace data interoperability and consumer-centric technology now, or risk irrelevance. “The Amazons and Apples of the world are not waiting for CMS to set the rules,” Keckley says.

Capital, Consolidation, and Private Equity

Capital constraints and the shifting role of private equity also featured prominently in Keckley’s remarks. With declining non-operating revenue and shrinking federal dollars, some health systems increasingly rely on investor-backed funding.

But this comes with reputational and operational risks. While PE investments have been beneficial to shareholders, Keckley says, they’ve also produced “some pretty dire results for consumers” — particularly in post-acute care and physician practice consolidation.

“Policymakers are watching,” he says. “Expect legislation that will limit or redefine what private equity can do in health care.”

Politics and Optics: Navigating the Policy Minefield

In the regulatory arena, Keckley emphasizes that perception often matters more than substance. “Optics matter often more than the policy itself,” he says.

He cautions health leaders not to expect sweeping policy reform but to brace for “de jure chaos” as the current administration focuses on symbolic populist moves — cutting executive compensation, promoting price transparency, and attacking nonprofit tax exemptions.

With the 2026 midterm elections looming large, Keckley predicts a wave of executive orders and rhetorical grandstanding. But substantive policy change will be incremental and unpredictable.

“Don’t wait for a rescue from Washington. The future is going to be built by those who understand the consumer, embrace transparency, and adapt to the realities of a post-institutional world.”

The Workforce Crisis That Wasn’t Solved

Keckley also addresses the persistent shortage of health care workers and the failure of Title V of the ACA, which had promised to modernize the workforce through new team-based models. “Our guilds didn’t want it,” Keckley notes, bluntly. “So nothing happened.”

He argues that states, not the federal government, will drive the next chapter of workforce reform, expanding the scope of practice for pharmacists, nurse practitioners, and even lay caregivers, particularly in behavioral health and primary care.

What Should Leaders Do Now?

Keckley closed his keynote with a challenge for marketers and strategists: Get serious about defining affordability, understand capital markets, and stop defaulting to legacy assumptions.

“Don’t wait for a rescue from Washington,” he says. “The future is going to be built by those who understand the consumer, embrace transparency, and adapt to the realities of a post-institutional world.”

He encouraged leaders to monitor shifting federal org charts, track state-level policy moves, and scenario-plan for a future where trust, access, and consumer empowerment define success.

Conclusion: A Health Care Reckoning in the Making

Keckley’s keynote was more than a policy forecast; it was a wake-up call. In a landscape shaped by economic headwinds, political volatility, and consumer rebellion, health care leaders can no longer afford to stay in their lane. They must engage, adapt, and transform, or risk becoming casualties of a system under siege.

“Health care is not just one of 11 big industries,” Keckley says. “It’s the one that touches everyone. And right now, no one is giving us a standing ovation.”

Unlocking Value in Non-Core Healthcare Assets

Posted on by • Posted in Capital Formation, Capital Structure, Cash, Cash Reserves, Days Cash on Hand, Debt Capacity, Debt Service Covenants, Debt Service Coverage Ratio, Health System, Hospital, Hospital Industry, Liquidity, Non-Core Assets, Non-Core Services • Leave a comment

Click to access Industry_Insights_6.1.23.pdf

Inflation, labor pressures, and general economic uncertainty have created
significant financial strain for hospitals in the wake of the COVID pandemic.
Compressed operating margins and weakened liquidity have left many
hospitals in a precarious economic situation, with some entities deciding to delay or even cancel planned capital expenditures or capital raising. Given these tumultuous times, hospital entities could look to the realm of the higher education sector for a playbook on how to leverage non-core assets to unlock significant unrealized value and strengthen financial positions, in the form of public-private partnerships.


These structures, also known as P3s, involve collaborative agreements between public entities, like hospitals, and private sector partners who possess the expertise to unlock the value of non-core assets. A special purpose vehicle (SPV) is created, with the sole purpose of delivering the responsibilities outlined under the project agreement. The SPV is typically owned by equity members. The private sector would be responsible for raising debt to finance the project, which is secured by the obligations of the project agreement (and would be non-recourse to the hospital). Of note, the SPV undergoes the rating process, not the hospital entity. Even more importantly, the hospital retains ownership of the asset while benefiting from the expertise and resources of the private sector.


Hospitals can utilize P3s to capitalize on already-built assets, in what is known as a “brownfield” structure. A brownfield structure would typically result in an upfront payment to the hospital in exchange for the right of a private entity to operate the asset for an agreed-upon term. These upfront payments can range from tens of millions to hundreds of millions of dollars.


Alternatively, hospitals can engage in “greenfield” structures where the underlying asset is either not yet built or needs significant capital investment. Greenfield structures typically do not result in an upfront payment to the hospital entity. Instead, (in the example of a new build) private partners would typically design, build, finance, operate and maintain the asset. The hospital still retains ownership of the underlying asset at the completion of the agreed upon term.


P3 structures can be individually tailored to suit the unique needs of the hospital entity, and the resulting benefits are multifaceted. Financially, hospitals can increase liquidity, lower operating expenses, increase debt capacity, and create headroom for financial covenants. These partnerships provide a means to raise funds without directly accessing the capital markets or undergoing the rating process. Upfront payments represent unrestricted funds and can be used as the hospital entity sees fit to further its core mission. Operationally, infrastructure P3s offer hospitals the opportunity to address deferred maintenance needs, which may have accumulated over time. Immediate capital expenditure on infrastructure facilities can enhance reliability and efficiency and contribute to meeting carbon reduction or sustainability goals. Furthermore, these structures provide a means for the hospital to transfer a meaningful amount of risk to private partners via operation and maintenance agreements.


For years, various colleges and universities have adopted the P3 model, which is emerging as a viable solution for hospitals as well.
Examples of recent structures in the higher education sector include:

  • Fresno State University, which partnered with Meridiam (an infrastructure private equity fund) and Noresco (a design builder) to
    deliver a new central utility plant. The 30-year agreement involved long-term routine and major maintenance obligations from
    the operator, with provisions for key performance indicators and performance deductions inserted to protect the university.
    Fresno State is not required to begin making availability payments until construction is completed.
  • The Ohio State University, which secured a $483 million upfront payment in exchange for the right of a private party to operate
    and maintain its parking infrastructure. The university used the influx of capital to hire key faculty members and to invest in their
    endowment.
  • The University of Toledo, which received an approximately $60 million upfront payment in exchange for a 35-year lease and
    concession agreement to a private operator. The private team will be responsible for operating and maintaining the university’s
    parking facilities throughout the term of the agreement.

  • Ultimately, healthcare entities can learn from the successful implementation of infrastructure P3 structures in the higher education sector. The experiences of Fresno State, The Ohio State University, and the University of Toledo (among others) serve as compelling examples of the transformative potential of P3s in the healthcare sector. By unlocking the true value of non-core assets through partnerships with the private sector, hospitals can reinforce their financial stability, meet sustainability goals, reduce risk, and shift valuable focus back to the core mission of providing high-quality healthcare services.

  • Author’s note: Implementing P3 structures requires careful consideration and expert guidance. Given the complex nature of these partnerships, hospitals can greatly benefit from the support of experienced advisors to navigate the intricacies of the process. KeyBank and Cain Brothers specialize in guiding entities through P3 initiatives, providing valuable expertise and insight. For additional information, please refer to a recording of our recent webinar and associated summary, which can be accessed here:
    https://www.key.com/businesses-institutions/business-expertise/articles/public-private-partnerships-can-unlock-hospitals-hiddenvalue.html

The extraordinary decline in not-for-profit healthcare debt issuance

Posted on by • Posted in Capital Formation, Competition, Financial Instability, Financial Performance, Financial Pressure, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Retrenchment, Strategic Change, Strategic Leadership, Strategy • Leave a comment

https://mailchi.mp/55e7cecb9d73/the-weekly-gist-may-12-2023?e=d1e747d2d8

Last month, Eric Jordahl, Managing Director of Kaufman Hall’s Treasury and Capital Markets practice, blogged about the dangers of nonprofit healthcare providers’ extremely conservative risk management in today’s uncertain economy.

Healthcare public debt issuance in the first quarter of 2023 was down almost 70 percent compared to the first quarter of 2022. While not the only funding channel for not-for-profit healthcare organizations,

the level of public debt issuance is a bellwether for the ambition of the sector’s capital formation strategies.

While health systems have plenty of reasons to be cautious about credit management right now, it’s important not to underrate the dangers of being too risk averse. As Jordahl puts it: “Retrenchment might be the right risk management choice in times of crisis, but once that crisis moderates that same strategy can quickly become a risk driver.” 

The Gist: Given current market conditions, there are a host of good reasons why caution reigns among nonprofit health systems, but this current holding pattern for capital spending endangers their future competitiveness and potentially even their survival. 

Nonprofit systems aren’t just at risk of losing a competitive edge to vertically integrated payers, whom the pandemic market treated far more kindly in financial terms, but also to for-profit national systems, like HCA and Tenet, who have been flywheeling strong quarterly results into revamped growth and expansion plans. 

Health systems should be wary of becoming stuck on defense while the competition is running up the score.

The Balance Sheet Bridge

Posted on by • Posted in Balance Sheet, Capital, Capital Formation, Capital Structure, Financial Instability, Financial Performance, Financial Pressure, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Operating Income, Operating Margin, Operating Performance, Restructure • Leave a comment

https://www.kaufmanhall.com/insights/blog/balance-sheet-bridge

Current Funding Environment

The healthcare financings that came in the past couple of weeks generally did well. Maturities seemed to do better than put bonds, and it remains important to pay attention to couponing and how best to navigate a challenging yield curve. But these are episodic indicators rather than trends, given that the scale of issuance remains muted. Other capital markets—like real estate—are becoming more active and offer competitive funding and different credit considerations relative to debt market options. Credit management continues to be the main driver of low external capital formation, but those looking for outside funding should spend time up front considering the full array of channels and structures.

This Part of the Crisis

And now it’s official. After JPMorgan acquired First Republic Bank—with a whole lot of help from the Federal Deposit Insurance Corporation—CEO Jamie Dimon declared, “this part of the crisis is over.” Not sure regional bank shareholders would agree, but from Mr. Dimon’s perspective the biggest bank got bigger, which made it a good day.

Last week the Federal Reserve raised rates another 25 basis points and the expectation (hope) seems to be that the Fed has reached the peak of its tightening cycle or will at least pause to see if constrictive forces like higher rates and regional bank balance sheet deflation slow activity enough to bring inflation back to the 2.0% Fed target. Assuming this is a pause point, it makes sense to check in on a few economic and market indicators.

Inflation is improving, although it remains well above the Fed’s 2.0% target range, and there are other indicators (like labor participation and unemployment) that have recovered some of the ground lost in 2020. But the weird part remains that this all seems quite civilized. To some, the Treasury curve spread continues to suggest a recession is looming, but in my neighborhood workers are still in short supply, restaurants are busy, and contractors are booked well into the future. Today’s ~3.36% 10-year Treasury rate is less than 100 basis points higher than the average since the start of the Fed interventionist era in 2008 and a whopping 257 basis points lower than the average since 1965. Think about how much capital has been raised in market environments much worse than now (including most of the modern-day healthcare inpatient infrastructure). Again, the main culprit in retarded capital formation is institutional credit management concerns rather than the funding environment.

The major fallout from the Fed’s recent anti-inflation efforts seems concentrated with financial intermediaries rather than consumers (or workers), and the financial intermediary stress the Fed is relying on to help curb economic activity is grounded in their own balance sheet management decisions rather than deteriorating loan portfolios. We’ve looked at this before, but it bears repeating that in the “great inflation” of the 1970s, the Chicago Fed’s Financial Conditions Index reached its highest recorded points (higher means tighter than average conditions) and in this most recent inflationary cycle, that same index has remained consistently accommodative. Can you wring inflation out of a system while retaining relatively accommodative financial conditions? Which begs the question of whether any Fed pause is more about shifting priorities: downgrading the inflation fight in favor of moderating the financial intermediary threat? We might be living a remake of the 1970s version of stubborn inflation, which means that all the attendant issues—rolling volatility across operations, financing, and investing—might be sticking around as well.

Meanwhile, somewhere out in the Atlantic the debt ceiling storm is forming. Who knows whether it will make landfall as a storm or a hurricane, but it does remind us that the operative portion of the Jamie Dimon quote noted above is this part of the crisis is over. The next part of the long saga that is about us climbing out of a deep fiscal and monetary hole will roll in and new variations of the same central challenge will emerge for healthcare leaders.

A Healthcare Makeover

Ken Kaufman has been advancing the idea that healthcare needs a “makeover” to align with post-COVID realities. Look for a piece from him on this soon, but the thesis is that reverting to a 2019 world isn’t going to happen, which means that restructuring is the only option. The most recent National Hospital Flash Report suggests improving margins, but they remain well below historical norms and the labor part of the expense equation is structurally higher. Where we are is not sustainable and waiting for a reversion is a rapidly decaying option.

My contribution to Ken’s argument is to reemphasize that balance sheet is the essential (only) bridge between here and a restructured sector and the journey is going to require very careful planning about how to size, position, and deploy liquidity, leverage, and investments. Of course, the central focus will be on how to reposition operations. But if organic cash generation remains anemic, the gap will be filled by either weakening the balance sheet (drawing down reserves, adding leverage, or adopting more aggressive asset allocation) or by partnering with organizations that have the necessary resources.

Organizations reach the point of greatest enterprise risk when the scale of operating challenges outstrips the scale of balance sheet resources. Missteps are manageable when the imbalance is the product of rapid growth but not when it is the result of deflating resources. If the core imperative is to remake operations, the co-equal imperative is continuously repositioning the balance sheet to carry you from here to whatever defines success.

The Not-for-Profit Healthcare Resource Chasm

Posted on by • Posted in Board, Capital Formation, Capital Formation Program, Debt Covenant Default, Debt Issuance, Debt Service Covenants, Operating Income, Operating Margin, Operating Performance, Performance Improvement, Public Debt Issuance, Resource Portfolio, Resource Priorities, Strategic Balance Sheet Management, Strategic Resource Allocation • Leave a comment

https://www.kaufmanhall.com/insights/blog/not-profit-healthcare-resource-chasm

Current Funding Environment

Healthcare debt issuance remains incredibly light. How long can a capital-intensive industry tolerate limited capital generation? Is pressure building to some tipping point when the need for capital and liquidity will outweigh defending a credit-rating position or avoiding what seems like high-cost debt? The sector generated a lot of internal and external capital in 2020-2021, but the falloff across all channels has been dramatic and residual resource positions are deteriorating.

The Need for Enterprise Performance Improvement

Recent economic releases—jobs report to CPI to PPI to retail sales—all suggest that the Federal Reserve’s efforts to bring inflation into line are yielding slower than hoped for results. The expectation is continued Fed tightening (higher rates), with a range of voices suggesting the Fed will be forced to push rates high enough to trigger a recession. Every restaurant and shop in the small town I live near has a “we’re hiring” sign in its window and each was jam-packed with very active consumers this past Presidents’ Day weekend. If success in taming inflation requires a broad-based hiring and economic slowdown, it feels like we have a long way to go.

Markets keep doing their thing, which frequently seems disconnected from the Fed’s thing. Both 30-year Treasuries and MMD are just starting to bump up against 30-year averages, the 10-year Treasury has moved higher over the past several weeks but remains below Effective Fed Funds, and the Chicago Fed’s National Financial Conditions Index continues to suggest relatively accommodative overall financial conditions.

While I question the depth and reliability of fixed income markets, the funding environment doesn’t seem as bad as the very low debt issuance activity would suggest. Channeling Shakespeare, it seems that “the fault, dear Brutus, is not in our stars, but in ourselves,”

meaning that low debt issuance is coming out of healthcare’s very profound resource problem rather than externalities.

I concluded a long time ago that not-for-profit healthcare credit and capital management is about strategic resource allocation. Healthcare leaders continuously rebalance the allocation of resources embedded in operations, credit position, and retained fixed and financial assets; and there has never been as challenging a resource generation and allocation moment as the one we are in and are likely to remain in for an extended period.

The scary version of all this is that not-for-profit healthcare has entered a resource chasm that will fundamentally degrade the sector’s credit and capital foundation.

COVID and inflation have combined to expose the brittleness of the healthcare resource chassis. The engine—operations—is bumping up against the dual pressures of:

  1. Labor-scarcity-driven strains on converting customer demand into realized financial resources; and
  2. A business model that doesn’t allow the efficient transfer of increased costs onto customers.

The result is unprecedented resource compression that leads to dramatically lower internal and external capital formation;

existential covenant threats; and the temptation, if not the necessity, to use retained wealth (i.e., spend down balance sheet) to support current operations versus funding growth or protecting long-term resiliency.

Every organization must aggressively identify and pursue operating performance improvement initiatives. But every organization needs to extend the idea of performance improvement to balance sheet, with the goal of addressing three total enterprise considerations:

  1. What Is Our Resource Portfolio? What is the catalogue of resources available to the organization? What form are those resources in? What is the roster of demands on those resources and is there balance or imbalance between the two? What are the consequences of imbalance and the costs of moving to balance?
  2. What Are Our Resource Priorities? How dependent is your organization on balance sheet to achieve success? Is balance sheet a critical liquidity or credit buffer against elevated operating and strategic volatility—the bridge between today and a successfully implemented operations performance improvement plan? Is it a source of external capital to fund strategic initiatives or defend overall liquidity? Is it an actual funding source and is this a departure from past practice? Is it an independent and alternative source of (non-operating) cash flow? Is the balance sheet role changing and what does that mean to operations, credit, resiliency, etc.?
  3. How Should Our Resources Be Positioned? Are balance sheet resources in their best form or is there a benefit from converting them into something different (like cash)? Will performance improvement initiatives alter positioning conclusions and, if so, does that improvement occur over an acceptable time frame? Can various resources be successfully converted today or are there cost or other impediments?

The need is to move out of siloed and into integrated and enterprise-centric performance improvement, which requires one consistent resource allocation mindset applied across operations, liabilities, real estate holdings, financial asset holdings, and every other class of organizational resources.

The need is to transition from thinking that balance sheet and operations can be disconnected thoughts to seeing them as two sides of the same coin.

Covenant threats continue to escalate, all centered on how reduced resource generation impacts debt service coverage.

We reiterate that it is critical for every organization to understand how its specific covenants work and to have a rolling forecast on expected performance.

As an example, many organizations now have coverage covenants where default requires two consecutive years of below the coverage ratio. This is an unconditionally good thing, but many of these same organizations may face a consultant call-in at year one and some of them may also confront year-two limitations on additional debt, merger, sale, disposition of assets, and a host of other important management levers. So, the good thing has conditions that are essential to understand and, perhaps, get ahead of. We have a robust library of covenant-related thought leadership on our website—ranging from written content to webinars—and our team is always ready to help.

Recalibrating a Responsive Capital Formation Program

Posted on by • Posted in Board, Capital Deployment, Capital Deployment Conviction, Capital Formation, Capital Formation Program, Counterparty Risk, Credit Quality, Credit Ratings, Federal Reserve, Federal Reserve Board, Public Debt Issuance, Risk Management, Unemployment, Unsustainable, Unsustainable Trends • Leave a comment
https://www.kaufmanhall.com/insights/blog/recalibrating-responsive-capital-formation-program?utm_source=mkto&utm_campaign=ken-weekly-blog&utm_medium=em&utm_term=230419&mkt_tok=NjU0LUNOWS0yMjQAAAGLOMvf3wlrxQiskARfvorkxds3JTcMc2G14da58d1UuzTNzCzrZEaiyJy2hHeespDdrd8KiyubgmMV4JOGL5KEPV10rjDGvAJRDvsOf_ctkbuh

Current Funding Environment

Wednesday’s inflation print showed a March increase of 0.1% versus February and a year-over-year increase of 5.0%, both of which were better than expected. Markets rallied following the news, at least until the specter of recession caused a reversal of equity gains. The game remains the same: markets want easy money and inflation plus unemployment plus recession equals Fed policy and interest rate levels. Memories of the long 1970s slog through declining and then accelerating inflation levels suggest that it’s too early to declare victory (5.00% is still a long way from the Fed’s 2.00% target range). Nevertheless, hopes increased that the Fed may truly be at or very near the end of its tightening cycle.

Unsustainable Trends

The web version of The Wall Street Journal got rid of its special section on the “2023 Bank Turmoil,” which is a sign that we’re past the worst of this chapter in the Dickensian saga in which our financial system hero navigates all sorts of unfortunate characters and events in search of a new “normal.” Banking distrust ripples continue, with various clients sharing the work they are doing to peel back layers of counterparty risk to understand whether threats loom in downstream financial dependencies. Our regulatory infrastructure has shown itself to be a mile wide and an inch deep, which fuels the kind of skepticism about the reliability of designated watchdogs that leads to self-directed risk assessments.

At one level, this is a helpful and important exercise. The credit and financing structure of any complex healthcare organization is just another supply chain, and it is good to understand how yours works and whether there are vulnerabilities that should be investigated. But it is equally important to assess whether the progression of COVID to inflation to Silicon Valley Bank has caused your organization to drift from risk management into retrenchment. Organizations naturally migrate along a risk continuum as they shift between prioritizing returns or resiliency. The important question isn’t which of these bookends is right, but rather what shapes the migration; the defining event is the journey, and

the critical Board and C-suite conversation is whether your risk management program is enabling or constraining future growth.

We continue to monitor the extraordinary decline in not-for-profit healthcare debt issuance. Sources we rely on show healthcare public debt issuance through Q1 2023 down almost 70% versus Q1 2022. Similar data sources aren’t available, but anecdotal input from our team suggests a comparable drop-off in healthcare real estate as well as alternative funding channels. At the same time, although margins have recently improved, operating cash flow across the sector has been weak over the past 12-18 months. If capital formation from internal and external sources is a sign of vibrancy, healthcare is listless.

The primary culprit isn’t rates; the sector has raised capital in much higher rate environments with fewer financing channels (including most of the pre-2008 era). Instead, the rationale most frequently advanced is concern about the reaction from key credit market constituents during this time of unprecedented operating disruption. Of course, this makes sense, but sitting underneath this basic rationale is the question of what might be called “capital deployment conviction.” Long experience confirms that organizations armed with a growth thesis they believe in aren’t shy about “selling” their story to rating agencies and investors and are willing to suffer adverse outcomes on rates, ratings, or covenants, if that is the price of growth. This isn’t happening right now, which introduces the troubling idea that issuance trends are about much more than credit management.

No matter the root cause, recent capital formation is not sustainable.

Good risk management leads to caution in challenging times, but being too careful elevates the probability that temporary problems become permanent. $2.8 billion in quarterly external capital formation ($11.2 billion annualized—pause and let that annualized amount sink in) is not sufficient to maintain the not-for-profit healthcare sector’s care delivery infrastructure, especially when internal capital generation is equally anemic. But introduce any competitive paradigm and the underinvestment that accompanies this level of capital formation becomes a harbinger of hard times to come. To riff on Aristotle, capitalism abhors a vacuum, and organizations looking to avoid rating pressure today may be elevating the risk of competitive pressure tomorrow; and it is easier to cope with and eventually recover from rating pressure than it is to confront the long-term consequences of well-capitalized and aggressive competitors. Retrenchment might be the right risk management choice in times of crisis, but once that crisis moderates that same strategy can quickly become a risk driver.

Machiavelli, Sun-Tzu, Napoleon, George Washington, and other great tacticians all advanced some variation of the idea that “the best defense is a good offense.” In the world of risk response, this means that the better choice isn’t to de-risk and hibernate but rather to continuously reposition available risk capacity so that you keep the organization moving forward. Star Trek’s philosopher-king Captain James Tiberius Kirk captured the sentiment best when he said, “the best defense is a good offense, and I intend to start offending right now.”

While getting back on the capital horse is important, clearing rates, relative value ratios, risk premia, and flexibility drivers have all reset over the past 12-18 months, so recalibrating a good capital formation program requires reassessment and may lead to very different tactics.

This means that a critical step is to get organized around funding parameters:

debt versus real estate versus other channels; MTI versus non-MTI; tax-exempt versus taxable; public versus private; fixed versus floating. The other important part of this is gaining conviction about capital structure risk versus flexibility: do you want to retain flexibility at the “cost” of incurring the market risk embedded in short-tenor or floating rate structures or do you want to sell flexibility in exchange for capital structure risk reduction?