Financing Options Available For Hospitals

Procuring financing for hospitals is not as easy as many think because a hospital is basically listed as a not-for-profit organization. It is not allowed to issue stock and debt financing stands out as the only real option available in most cases, all through tax-exempt bonds. There are also some for-profit hospitals, of course. They are allowed to issue bonds and stock but those will not be tax exempt. Really large systems will even be a player on S&P 500.

For both profit and not-for profit entities, a viable option is given by third-party capital. In this case, hospital management consulting may be necessary as there will be strict conditions that would have to be respected. Developing joint ventures can be a thing that would be considered after a strategic analysis of available health system finances and what the hospital needs.

As any health system like a hospital is being evaluated, debt-to-income ratio and financing type need to be taken into account. Generally speaking, those entities that are allowed to issue bonds to the organizations that are not-for-profit will be limited. There are limit issuance rules towards one authority based on state laws. In some states, however, there are statewide and local authorities that need to be consulted. The authorities are going to usually act as a liaison between investment banking firms and investors. Issuing bonds implies a cost that will depend upon marketplace competition and issuing authority. Costs are going to affect yield obtained from the bond.

As bonds are assessed, for both types of entities, there are 4 main characteristics that have to be taken into account:

  • Maturity terms
  • Type of interest rate – variable versus fixed
  • General obligation bond or revenue bond
  • Bond insurance utilization

All of the factors highlighted are going to help properly assess entity overall financial picture.

Obviously, you can always use third party capital. This is something that is rarely considered by the not-for-profit hospitals as there is this belief that bonds are always a much better idea. The notion is considered since tax exempt debt will not be as expensive on a long term. While this is normally the case, it is important that hospital management staff takes into account every single option that is available.

An alternative that is also to be considered at times is the hybrid arrangement. You can create a joint venture deal between for-profit and not-for-profit establishments. We often see this in correlation with ambulatory care facilities but this is not a limit.

To sum up, the modern healthcare marketplace is so much more dynamic than it ever was. It is very important for all hospitals to basically think about all the financing options that can be considered before any arrangement or deal is signed. In most cases it is the management staff that will make the decision but when there is no experience in dealing with financing many problems can appear. Navigating governing laws can be a lot more complicated than what many think. This is why sometimes it is better to hire someone with experience.

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