Question

Healthcare is expensive. It takes an enormous amount of capital to secure the necessary resources to finance the care delivery continuum. The cost and sources of that capital is critical to being able to understand the cost of conducting business in general and also forms the basis on which future projects can be evaluated on a quantitative basis (e.g., capital budgeting, lease financing, etc.).

For this discussion, do the following: Consider you are determining which type of financing to be used for a new project in your hospital. Your hospital is doing financially well and has money that can be used for financing—it also has a top credit rating that could be used for debt financing as well. Review the pros and cons of each financing opportunity. Discuss your selection for financing which would be optimal for your hospital. Why did you choose this option?

Answer 1

Health care sector is considered to be essential and hospital is one of the most important segment of this industry. Hospitals are very important. It should be available to each irrespective of status, money, etc.

For starting a new project in the hospital, I would go for a mix financing. I will use both the equity and debt. I will use 70 per cent as debt and the rest as equity. This is so because hospitals are not profit oriented entity at least it should not be. Using 100 per cent equity might not be advisable as the objective of common shareholders is the wealth maximization. This does not sounds good especially in the health care sector. Equity holders always needs a continuing growth which may put the hospital extra pressure. In this way, hospital might use some unethical practice which is not good for this sector.

Issuing 100 per cent debt will also be not a good decision. As the debt are the charge against the profit which means interest are always payable no matter if the hospital has the cash flow or not. This will also put extra pressure and non payment of debt might affect the operations.

So, the effective financing mix will be both debt and the equity. Some part of the debt is good as the hospital is having a good reputation and the growth. So, it will easy to pay the interest. On the other hand, some part of equity is needed to diversify the operations of the hospitals so that it can reach to the needed persons or the individuals.

The pros of the debt is it is very simplex to understand and only interest are payable at the certain time period. They do not need growth in their capital. The cons is it is charge against the profit. The hospital will have to pay whether it is making the profit or not.

The pros of equity is that an entity do not require to pay it on a certain time period. That means a company may or may not pay the dividend to the equity holders. It is company's discretion. This will not put extra pressure on the hospital to pay them regularly.

The cons is they have voting right they can question about anything at anytime. Also, they need a growth in their capital invested.

So, I would go for mix financing. The 70 per cent will be debt and the 30 per cent will be equity. The debt can be easily issued as it has good credit rating. It has good reputation. It has also good level of cash flow, so servicing the debt will not be an issue. The 30 per cent will be equity because every businesses needs to grow like for the hospitals, the R&D (Research and development) is very important. To invest into R&D, the hospital needs high level of capital.

Hence, the optimum financing will be a mix of debt and equity both.