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Tough Funding in Difficult Times
By Calvin Wiese; MBA, CPA
Staff Writers
In general, hospitals have three sources of capital available to them: [1] equity from earnings, [2] equity from donations, and [3] long-term debt. And, the general domestic economic cycle may either exacerbate or retard capital raising efforts for all healthcare organizations. Today, the hospital capital funding acquisition scenario is difficult indeed.
Earnings Equity
Earnings generate cash, and a portion of that cash is available to fund capital investments. Besides funding capital investments, cash generated from earnings is used to fund working capital. As operations grow, more working capital is required to fund the difference between the operating receivables and operating payables since days of revenue in receivables tend to be a good deal higher than days of expense in payables. Additionally, cash on hand [COH] should increase as operations grow so that days of cash remain constant or increase. Once working capital has been adequately funded, any remaining cash generated from earnings is available to invest in capital.
Not-for-Profit Entities
Most not-for-profit hospitals engage in active fundraising to generate donations. Donations are a good source of capital in certain markets. Often, fundraising initiatives are less useful than they appear due to the costs expended in the fundraising activities. It is important to ensure that all the costs incurred in fundraising activities are properly attributed.
Borrowing
Borrowing long-term debt has been an important source of capital for hospitals and will continue to be. Debt is particularly attractive due to the low cost associated with borrowing on a tax-exempt basis. Long-term debt, borrowed on a tax-exempt basis, is probably the lowest cost form of capital available to hospitals. Tax-exempt borrowing is fairly complex due to the tax regulations affecting it. Because of its complexity, the costs associated with these transactions are quite high, making it less practical for small borrowings www.HealthcareFinancials.com
Special Borrowing Transactions
Finally, tax-exempt borrowing transactions require many lawyers and high-priced investment bankers. Credit rating agencies and credit enhancers are also typically involved. Accessing the tax-exempt markets requires a good bit of sophistication and expertise. Despite these requirements, this capital is highly attractive to hospitals and should be used whenever possible.
Assessment
Currently, as the adverse business cycle grinds on, and the – now official – recession deepens, credit rating agency Fitch has just changed its not-for-profit hospital sector view to negative, from a previously stable status. And, Hospital Corporation of America [HCA] is resorting to potentially risky payment in kind (PIK) debt swaps to keep its bonds afloat.
Conclusion
And so, your thoughts and comments on this Medical Executive-Post are appreciated.
Related Information Sources:
Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
Physician Financial Planning: http://www.jbpub.com/catalog/0763745790
Medical Risk Management: http://www.jbpub.com/catalog/9780763733421
Healthcare Organizations: www.HealthcareFinancials.com
Health Administration Terms: www.HealthDictionarySeries.com
Physician Advisors: www.CertifiedMedicalPlanner.com
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Filed under: Health Economics, Retirement and Benefits | Tagged: capital structure |
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