Question

Review the HBO movie "Too Big to Fail" and your reading and interpretation of Chapter 11(including Supplement) and the Chapter 12 Supplement, what are your thoughts on how "market risk" affects the health care arena in terms of financial stability. Try to think about and discuss interest rates a health care providers investments in the market (ie their purchase of stocks and bonds to hold as assets in the form of investments on their balance sheet and related non-operating income on their income statement), healthcare debt (their issuance of bonds as liabilities on their balance sheet and related interest expense on their income statement), general access to capital and the capital markets to issue new debt or refinance existing debt, access to credit enhancements such as Bond Insurance and Rated Debt as provided by the major Rating Agencies such as Standard and Poor's , Moody's and Fitch

Answer 1

First on most lists of factors explaining the growth of investor ownership and multi-institutional systems is ''access to capital." Although capital costs represent a relatively small proportion of health care costs (on average, approximately 7 percent of hospital costs under the Medicare program), capital expenditures (for example, for new technologies) often translate into higher operating costs. Access to capital by health care institutions is crucial not only to their own future but to the future shape and configuration of the health care system itself. Access to capital is also integral to the topic of this report, because it is affected (by definition and in practice) by whether institutions are for-profit, not-for-profit, or government owned.

Like any form of organized economic activity, health care organizations need financial capital to carry out their functions.Before an organization can provide services or undertake a new program, it must use financial capital to purchase or rent space, equipment, supplies, labor, and so forth—that is, to prepay for certain inputs used in the production of health services. Normally, these prepayments are expected to be recovered eventually through cash revenues earned by rendering health services or, in the case of some public or not-for-profit institutions, from nonoperating revenues (e.g., charitable contributions, governmental appropriations, income of subsidiary organizations).

Access to financial capital is essential to any health care organization that would respond to changes in its community, acquire new technologies and replace old equipment, renovate or replace deteriorated facilities, offer new programs or new services, or make changes to improve productivity or enhance quality. Much attention has been given to the aggregate future needs for financial capital among hospitals. Estimates of such needs in the 1980s vary widely, depending on assumptions, from $100 billion to nearly $260 billion (ICF Incorporated, 1983; Cohen and Keene, 1984:24-26). Assessments of the ability of health care organizations to raise needed capital vary as well.

Clearly, with overall hospital occupancy at 66 percent, there are many areas of the country in which the supply of hospital beds is excessive. However, even if a significant number of hospitals should close, there are many purposes for which other health care institutions will have substantial needs for capital funds in the future. Debt must be retired. Facilities and equipment must be kept current and in good repair. Some hospitals (or portions thereof) will need to be reconfigured; alternative sites will have to be developed for long-term care and ambulatory care; and other steps will be necessary if hospitals are to become more comprehensive health care organizations. Also, certain areas of the country have rapid population growth, and new facilities or expansions of existing hospitals may be needed.

Thus, health care institutions have and will continue to have substantial capital needs, and access to capital translates directly into institutional ability to grow and even to survive. Differences among health care sectors in their access to capital will shape the future makeup of the health care system.

Substantial costs are incurred not only in obtaining equity and debt financing, but also in obtaining governmental or philanthropic grants and contributions. Debt requires (and equity investments usually require) that periodic payments of interest (or dividends) be made. To all sources of capital are attached certain expectations of performance; however, the expectations tied to various sources of capital differ in some very significant ways.