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Association of Debt Financing with Not-For-Profit Hospitals
[By Dr. David Edward Marcinko; MBA, CMP™]
US not-for-profit hospitals undertook unprecedented amounts of debt in the mid-to-late 1990s. This happened because sparse corporate finance theory – and the modicum of economic literature on hospital financing at the time – suggested that debt constrained hospitals’ capacity to deliver uncompensated care.
Little Research
Yet, few health economists empirically evaluated the potential association of debt financing with uncompensated medical care. Of the first perhaps – in our space – was Stephen A. Magnus; PhD, MS Assistant Professor, Department of Health Policy and Management, University of Kansas School of Medicine; Dean G. Smith, PhD, Professor and Chair, Department of Health Management and Policy, University of Michigan School of Public Health; and John R.C. Wheeler, PhD, Professor, Department of Health Management and Policy, University of Michigan School of Public Health [personal communication].
Multi-State Statistical Analysis
In one of the first statistical analyses of a multi-state sample of audited hospital financial statements in 1997 – and ultimately published in the Journal of Health Care Finance in 2004 – the researchers found that hospital debt levels predict higher levels of uncompensated care.
More Tax-Exempt Debt Issued
As further studies yielded similar results over time; hospital boards, policy makers and regulators concerned with the provision of uncompensated care encouraged hospitals to issue more debt. This encouragement was provided through explicit flexibility, such as removing requirements for hospitals to issue tax-exempt bonds through state finance authorities and/or removing the project financing constraint. Likewise, hospital CFOs and physician-executives who managed their organizations’ financial risk, benefited from a realization that optimizing the sources of financing did not impede mission-related objectives.
Assessment of Temporal Trade-Offs
Relationships between hospital operations, including uncompensated care, and capital structure represent a fruitful area for future investigations. A key issue to explore is the possibility of inter-temporal trade-offs. Higher levels of debt may initially help to fund public services like uncompensated medical care, but debt repayment eventually could limit a hospital’s ability to provide core community benefits.
Bankruptcies
Up until the recent financial meltdown and credit market freeze, even current studies still seemed to offer no evidence to support concerns that debt had a negative impact on uncompensated care. However, hospitals filing bankruptcy in the fourth quarter, of 2008 included: a two-hospital system in Honolulu; one in Pontiac, MI; Trinity Hospital in Erin, Tennessee; Century City Doctors Hospital in Beverly Hills, Lincoln Park Hospital in Chicago, and four hospital system Hospital Partners of America, in Charlotte.
Assessment
On the other hand, research results simply may have reflected the unusual economic and stock-market conditions prevailing in the mid 1990s; that are certainly not present today.
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Filed under: Health Economics, Healthcare Finance, Research & Development | Tagged: charity care, pro bono care, uncompensated health care, uncompensated medical care |
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More on Non-Profits,
Most hospitals are not-for-profit.
In not-for-profit hospitals, no private party actually “owns” the hospital; control is vested in various boards, but no one explicitly “owns” a not-for-profit hospital.
In a broad sense, communities own not-for-profit hospitals. They are considered “charities” with a “charitable purpose.” Though a not-for profit hospital may not have owners, it has many” stakeholders,” parties that have vested interests in the continuing success of the hospital.
Calvin Weise; MBA, CPA
http://www.HealthcareFinancials.com
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Ongoing pressures signal weak nonprofit hospital finances
According to major ratings agencies, the financial outlook for not-for-profit hospitals will remain negative for at least the next several years, reported AHA News
http://www.ahanews.com/ahanews/jsp/display.jsp?dcrpath=AHANEWS/AHANewsNowArticle/data/ann_012612_credit&domain=AHANEWS
Now. In separate reports issued by Moody’s Investors Service and Standard & Poor’s, both rating services see a tough operating environment ahead for hospitals.
http://www.moodys.com/research/Moodys-US-not-for-profit-healthcare-outlook-remains-negative-for–PR_236074
Camden
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For Nonprofit Hospitals Who Sue Patients – New Rules
[UPDATE]
Nonprofit hospitals get big tax breaks for providing care for patients who can’t afford it.
http://www.propublica.org/article/for-nonprofit-hospitals-who-sue-patients-new-rules?utm_source=et&utm_medium=email&utm_campaign=dailynewsletter&utm_content=&utm_name=
Under new IRS rules these hospitals must take extra steps to inform poor patients they may qualify for financial assistance.
Dr. David Edward Marcinko MBA
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