Question

Consider three important healthcare industries: hospitals, medical equipment manufacturers, and biotechnology companies.  On average, which of these industries uses the most debt financing and which uses the least?  Which industry sits in the middle?

Answer 1

Debt financing is becoming a more chosen option in the healthcare industry day by day. Going by the general market average, the ranking based on decreasing order of debt financing is:

1. Medical Equipment Manufacturers
2. Hospitals
3. BioTech Companies

REASONS:
Taking debt financing depends on how well a firm manages its collections. Since the failure to collect receivables as per schedule can impact the debt repayment putting the firm at a risk of default. Since the collections of an equipment manufacturer is usually not that high, most OEMs (Original Equipment Manufacturer) use debt as a mode of financing,

For a hospital, the collections period gets delayed because most of the patients don't directly pay for their medical bills. It's usually the insurance company that picks up the cheque. Then again in the background its actually their employer that pays the insurance firm as a part of the person's compensation. So, for the hospital to actually receive funds, it can take quite a while, meaning it cannot pay out debt as early as creditors might ask it for. Though there are few hospitals that are taking up debt financing these days.(Read About Connecticut Hospitals for more info)

BioTech companies have to pass through several fund raising rounds before they can actually launch a drug. Plus there's FDA and all other approvals. Further investors are wary about the success of the drug in the market (and hence the cash flows) even assuming the drug gets launched. So debt is rarely available to bio technology companies due to uncertain and uneven cash flows.