Debt-maturity structures should match risk preferences.

Key to any debt-maturity matching strategy is financing assets with the appropriate debt structure. Financial managers need to establish an optimal capital structure and then choose the best maturity-matching structure for their debt. Two maturity-matching strategies that are available to healthcare financial managers are the accounting approach and the finance approach. The accounting approach, which defines asset maturities as current or fixed, is a riskier financing strategy than the finance approach, which defines asset maturities as permanent or temporary. The added risk occurs because of the accounting approach's heavy reliance on short-term debt. The accounting approach offers the potential for lower costs at the expense of higher risk. Healthcare financial managers who believe the financing function should support the organization's operations without adding undue risk should use the finance approach to maturity matching. Asset maturities in those organizations then should be considered permanent or temporary rather than current or fixed, and the debt-maturity structure should reflect this.

Differences in characteristics of hospitals with sustained high and sustained low profitability.

The organizational and operational characteristics of 140 private Florida hospitals with sustained high profitability and sustained low profitability were compared using pretax operating margin (PTOM) and pretax return on assets (PROA) measures. Approximately 15 to 20 percent of hospitals were defined as PTOM or PROA high-profit or low-profit for the years 1990, 1991, and 1992. The PTOM or PROA high-profit groups had a lower adjusted average length of stay and debt utilization, and a higher labor yield, occupancy rate, and percent with high hospital accreditation ratings (p < .05). In addition, the PROA high-profit group had a higher case-mix index and Medicare mix (p < .05). Characteristics that were different for high-profit and low-profit groups were within the scope of management.

Using MVA and EVA to measure financial performance.

Two measures of financial performance that are being applied increasingly in investor-owned and not-for-profit healthcare organizations are market value added (MVA) and economic value added (EVA). Unlike traditional profitability measures, both MVA and EVA measures take into account the cost of equity capital. MVA is most appropriate for investor-owned healthcare organizations and EVA is the best measure for not-for-profit organizations. As healthcare financial managers become more familiar with MVA and EVA and understand their potential, these two measures may become more widely accepted accounting tools for assessing the financial performance of investor-owned and not-for-profit healthcare organizations.

Predicting financial risk under capitation.

As managed care proliferates, providers must understand the types of financial risks they face when providing care under capitation. There are two basic types of financial risk (which arises from uncertainties about revenues and costs): objective risk and subjective risk. Objective risk exists when financial managers can anticipate, with reasonable confidence, the expected range of revenue and cost variation. Subjective risk exists when financial managers cannot accurately predict the range of revenue and cost variation. Providers moving from a prospective payment system to a capitated system will find that objective financial risk potentially is reduced. However, subjective financial risk under capitation can be significant. To minimize subjective risk, healthcare executives must have access to data about the population covered by the capitation contract, must have sufficient numbers of covered lives, must reduce costs involved with providing healthcare services, and must reduce the volume of patients treated--for example, by implementing disease and injury prevention programs.

Hospital capital structure decisions: theory and practice.

The paper explores capitalisation decisions within the hospital sector. This is done theoretically by examining the appropriateness of capital structure theory of hospitals and also in a real world context of soliciting the views of hospital chief financial officers. The ways in which capital decisions are made is described and the relationship of practice to theoretical models discussed.

Capital investment analysis: three methods.

Three cash flow/discount rate methods can be used when conducting capital budgeting financial analyses: the net operating cash flow method, the net cash flow to investors method, and the net cash flow to equity holders method. The three methods differ in how the financing mix and the benefits of debt financing are incorporated. This article explains the three methods, demonstrates that they are essentially equivalent, and recommends which method to use under specific circumstances.

The determinants of hospital profitability.

Although numerous studies related to hospital costs and financial condition have been conducted, no studies have specifically attempted to identify the underlying determinants of hospital profitability. If these factors are identified, hospital executives can focus their efforts on those aspects of operations that most affect profitability, and public policymakers can gain insights into the potential effects of alternative policy decisions on hospital financial viability. Our study uses multiple regression analysis with 22 hypothesized profitability determinants as independent variables and five profitability measures as dependent variables. The data set consists of 1989 data from 169 investor-owned and private not-for-profit general acute care hospitals in the state of Florida. The results provide evidence that selected managerial and patient-mix variables are predictors of profitability. Structural factors that are beyond the control of managers (organizational and community characteristics) appear to be less important in influencing profitability. These findings may be viewed positively by hospital executives since it appears profitability is not dictated by organizational or market factors but more strongly influenced by factors that, to some extent, can be influenced by hospital policies and practices.

Factors influencing high and low profitability among hospitals.

This article examines the determinants of exceptionally high and exceptionally low profitability among hospitals. Using 1989 data from a sample of 169 acute care hospitals in Florida, it reveals that debt load, labor intensity, and Medicare mix play important roles in exceptional profitability. Administrators can therefore take selected actions over the long run to alter their hospital's chance of exhibiting exceptionally high or exceptionally low profitability.

Project risk definition and measurement in a not-for-profit setting.

The health care finance literature on capital investment decisions generally applies conventional market risk concepts without distinguishing between proprietary and not-for-profit forms of organization. Since proprietary firms have shareholder wealth maximization as their primary goal, a project's relevant risk is its contribution to the riskiness of the equity investors' well diversified stock portfolios, or its market risk. However, not-for-profit organizations do not have shareholder wealth maximization as their primary goal, and thus market risk concepts are not applicable. Rather, the relevant risk in a not-for-profit setting is a project's corporate risk; that is, the project's contribution to the riskiness of the organization. The difference in risk definition and measurement between proprietary and not-for-profit firms has two implications for managerial decisions: (1) in making capital investment decisions, a manager must define and measure a project's riskiness on the basis of the firm's organizational form; and (2) although diversification for the sole purpose of risk reduction is not a valid rationale for proprietary firms because stockholders can achieve the same result at less cost, risk-reducing diversification does make sense for not-for-profit firms.

Accuracy of investment risk models varies.

Financial analysis of proposed capital investments must include an assessment of risk as well as return. Four assessment techniques can be used to provide insight into the risk inherent in any capital investment project: breakeven analysis, sensitivity analysis, scenario analysis, and Monte Carlo simulation. The most complete picture of a project's stand-alone risk is provided by a Monte Carlo simulation, which generates a profitability probability distribution. The primary concern of most hospital decision makers, however, is the amount of risk the capital investment adds to the riskiness of the hospital in the aggregate.

Leasing capital assets and durable goods: opinions and practices in Florida hospitals.

Although leasing is a major source of financing for hospital capital acquisitions, the rationale for choosing leasing over conventional financing is not clear. This article examines academic and leasing company views, and then surveys hospital executives to obtain their views.

Using Monte Carlo simulation to make better capital investment decisions.

The financial analysis of a proposed capital investment typically involves estimating the project's expected cash flows and profitability and then perhaps looking at one or two alternative scenarios. However, this procedure provides incomplete information about a project's potential risk/return characteristics because it focuses on only a few possibilities; whereas, real-world investments can have an almost unlimited number of financial outcomes. Monte Carlo simulation can solve the incomplete information problem. In a Monte Carlo simulation, relatively certain input variables are specified by single values, while relatively uncertain variables are specified by probability distributions. The end result is a probability distribution that describes the project's full range of potential profitability. With a complete set of information concerning a project's risk/return characteristics, decision makers can better judge the financial impact of the investment and hence make better capital investment decisions.

Analysis provides test for profitability of new services.

Breakeven analysis gives healthcare financial managers a tool for weighing the potential profitability of adding a new service. The method estimates profit or loss at various usage levels, showing at what level costs and profits meet. The analysis also lends itself to evaluating alternate courses of action, which may be compared to determine the best route to follow under various expansion proposals.