The anatomy of the revenues in integrated health systems (IHS)

In fully integrated health systems (i.e. those that employ most, if not all, providers required for missions, clinical programming, strategy and financial requirements) the majority of net operating revenues will be generated in outpatient service arenas.

Even the larger IHS’, serving populations of higher clinical acuity, are principally in the outpatient business. Discussions with larger, integrated health system show that inpatient care many account for as low as 27% of all operating revenues. The combination of outpatient diagnostics and therapeutics together with outpatient professional fees are likely to account for in excess of 55-60% of net operating revenues.

IHS strategists are bending toward fewer larger, multispecialty ambulatory facilities to deliver outpatient services (typically 50,000-250,000 sq. ft.).  These facilities are branded with the IHS name and designed to accommodate evolving clinical care models (see

Frauenshuh HealthCare Real Estate Solutions

for examples and related case studies).

Financial officers in organizations moving to more integrated models typically report under-investments in the right type of outpatient care environments. Many also report the need to expand outpatient facilities at the same time inpatient facilities require upgrades and renovations. Financing rapid expansions of outpatient centers will remain a challenge well into the future.

There are growing arguments for the application of alternative financings for strategic facilities for IHS’. CEOs and financial offers should examine critically the true weighted average cost of capital as it relates to tax exempt financings as compared with alternative financing models. Not-for-profit, tax-exempt organizations may “tip” too quickly to tax-exempt bonding strategies based upon traditional thinking as it relates to WACC analyses; especially to extent that credit agency ratings and bond covenant requirements cause capital to be “locked-up” within health system balance sheets; e.g. debt-to-capital, debt coverage ratios, equity and liquidity ratio requirements cause capital to be trapped in health system balance sheets when traditional tax-exempt bonding is the preferred route for asset financings. 

Daniel Zismer, Ph.D.2013