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Business Officer Magazine

Risk and Reward

When it comes to debt management, capital markets value the collaboration of leaders at universities that also operate academic medical centers. Integrating the goals of the two entities generally results in a long-term strategy that improves access to capital.

By Karla Hignite

The health-care marketplace points toward expansion and greater collaboration. In the feature article "Academic Medical Centers: Mission-Centric Role Models," in April 2015 Business Officer, higher education leaders explained ways that colleges and universities can learn from academic medicine's evolution—while maintaining mission clarity.

Perhaps more important than the way the university–academic medical center (AMC) relationship is structured is the ensuring of a shared culture of collaboration and transparency between the academic and health-care components of the organization.

Barclay's Managing Director John Augustine leads the company's higher education AMC group. "We work with institutions and AMCs across a broad spectrum of financial matters but are focused most closely on how we can help them think about the best use of capital markets to achieve their objectives. A lot of our work revolves around debt strategy—finding the best advantage in terms of raising capital, and articulating this strategy to investors since this is a fairly capital-intensive endeavor within a very competitive marketplace."

Capital markets have largely come to value the integrated role between the hospital and university as positive, because the meld between university and AMC leadership tends to take a long-term management view, notes Augustine. "When these two entities are working together closely—regardless of their combined or affiliated structural model—they typically enjoy improved access to capital no matter whether they seek funding separately or together."

Here are some other relevant points:

Role of rating agencies. While funding strategic investment in medical schools has generally been credit positive, ratings agencies must continually assess the potential for volatility within the health-care sector. "From a credit and ratings perspective we want to understand the legal relationship and structure of these entities," says Kimberly Tuby, a vice president and senior credit officer for Moody's Investors Service.

Coordinated strategies. Regardless of the nature of the relationship between the university and its AMC, the level of strategic alignment is important, adds Susan Fitzgerald, senior vice president of Moody's global higher education and not-for-profits team. "To be credit positive, we want to see that these entities are closely coordinating strategic direction, debt decisions, and philanthropic activities," she says. "When that clear coordination isn't present, it can be a credit concern."

Financial coordination. Another area where Moody's pays close attention is the financial link between the hospital and university. "Specifically, we look at the level of support flowing from the hospital to the medical school and try to determine how sustainable that is and how dependent the medical school is on that annual transfer," says Tuby. "In thinking of the broader interest in this unique relationship, we also have to factor in impacts on the research brand and reputation of the organization." That can be a positive thing, she notes. "More can be done to leverage the university and hospital brand to grow research funding through philanthropy and private sources of funding. A strong AMC and university tend to secure substantial gifts for medical research."

That has been true for The Ohio State University, which receives some of its largest donations to its cancer program, says Geoffrey Chatas, OSU senior vice president for business and finance and CFO. "We rely on philanthropy more than some other AMCs do, so being creative about how we engage our community and donors is very important." An annual cycling event that began in 2009, for example, has raised more than $86 million to support research at the university's Arthur G. James Cancer Hospital and Richard J. Solove Research Institute. Every dollar raised goes directly to research, Chastas notes, because sponsors cover the costs of organizing the ride.

KARLA HIGNITE, Ogden, Utah, covers higher education business issues for Business Officer.

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