Giving Credit Where Credit is Due
Folks cite lots of reasons for enjoying life in Vermont, especially in the summer – relatively cool temperatures (most summers), ready access to many forms of recreation and the absence of crowds of people, to name a few. The latter is a big one for me. I bristle at a “traffic jam” when it takes five minutes to get through the jug-handle instead of the usual two minutes. So, there has to be a very good reason for me to travel to a place like New York City. Recently, the good reason was our annual credit review.
Like many not-for-profits, Fletcher Allen raises money through the sale of tax-exempt bonds, using proceeds from the sale as capital to fund various projects. This is how construction of the McClure building and the Ambulatory Care Center (ACC) on our medical center campus were financed. People purchasing the bonds are essentially providing us a loan, and we pay them interest until the loan is repaid.
Before purchasing, potential investors want to know the creditworthiness of the organization to ensure that they can recover their investment and make money in the transaction. This is where the rating agencies come in, as they provide an independent assessment of creditworthiness. Standard & Poor’s (S&P), Moody’s and Fitch are the “big three.” In general, the better the risk, the lower the interest rate, and since we finance patient-care projects through the sale of bonds, we want the best rating possible in order to contain the cost of raising capital.
Accompanied by Roger Deshaies, Sophia Holder and Marc Stanislas from our Finance team, I spent two days in July in New York City for meetings with two of the three rating agencies, Fitch and S&P. My aversion to crowds is still strong, and navigating the streets and sidewalks in the financial district on a Monday at 8:00 a.m. is quite different from a paddle on a secluded bay in Lake Champlain.
Our task during the credit review was to update rating-agency analysts on our strategic direction as an organization, financial performance and operational accomplishments. At both meetings, we emphasized our progress in developing an integrated delivery system to better serve patients in our region through the affiliation with Central Vermont Medical Center (CVMC) and a pending affiliation with New York hospitals Champlain Valley Physicians Hospital (CVPH) and Elizabethtown. We also related our drive toward high reliability with specific examples and favorable comparisons with other academic medical centers’ quality measures. Of course, our recent solid financial performance was of considerable interest. Overall, the analysts at S&P and Fitch were favorably impressed with our strategic direction and current performance. As a result, S&P granted Fletcher Allen an upgrade to BBB+ (AAA is the highest rating possible).
Fletcher Allen has been an “A-rated” organization in the past, and it is important to regain this status so we can borrow funds in future for much-needed improvements in our patient care facilities. What did the recent trip teach us about what is required to achieve this goal? First and foremost, we need to maintain the high quality of our services and essentiality to the region we serve. Second, we need to gain financial strength and consistently achieve a 4% operating margin; for the FY 2013 budget, we have set this goal for the first time in many years. Third, over the next several years, we need to demonstrate the clinical, financial and operational benefits of our affiliations.
Our strategic initiatives will guide the way toward achieving all three goals. With the external validation that our strategic direction is correct and what we learned on our trip to the city, it was well worth leaving our bucolic backyard for a couple of days and I’m looking forward to next year. The “A” rating awaits.
John R. Brumsted, M.D. is the President and Chief Executive Officer of Fletcher Allen Health Care and Fletcher Allen Partners.