Healthcare organization in the current market scene face various challenges when it comes to managing their capital. The facilities have to grapple with making decisions in an environment that presents an uncertain future due to limited data and a volatile market (Stichler, 2009). The first significant challenge in managing capital comes in the balance between expansion and optimizing core-operations (Choi, 2017). There is usually the pressure to reach more clients and keep investors and sponsors interested in the business through development. However, with limited finances, the running of core operations may suffer. Therefore, balancing the two is a challenge that management need to unravel.
The second major challenge is new legislation which may hamper current operations. More often, the government may come up with unfavorable policies that may not adequately consider the financial positions of the healthcare facilities (Stichler, 2009). For example, setting a specific staff to patient ratio or insisting on the use of certain technologies may force the organization to deviate funds from constructions and expansion. The final challenge entails the risk of not investing in capital projects (Management Today, 2018). Reducing on expansion projects results in dwindling chances of accessing capital debts, low public reviews, less investor support, and credit rating downgrades. Therefore, any facility must ensure that it prioritizes its plans.
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Description of Facility
PrimeCare Hospital is an established healthcare facility with 13 branches scattered in three states. The hospital offers treatment in eight specialties. These fields include General practice, pediatrics, radiology, dentistry, ophthalmology, oncology, dermatology, rehabilitation. The hospital is a for-profit facility that is a profitable venture that has supportive sponsors, investors, and a dedicated stream of loyal clients. However, the hospital still has to grapple with financial challenges since it has an aggressive expansion plan (Stichler, 2009). Its desire to add three more specialties and start operations in three other states places a considerable need for it to source for finances. As it channels finances to the big projects, a need arises to find short-term funds to fiancé the day-to-day operations.
External Short-term Debt Financing Options
Direct Bank Loans
Various government regulations have made it possible for hospitals to access loans from banks. The Troubled Asset Relief Program of 2009 and the American Recovery and Reinvestment Act (ARRA) has seen the increase of credits that can be granted to hospitals (Management Today, 2018). Currently, a facility can get up to $30 million of short-term loans from the traditional $10 million. The favorable economic environments make it necessary for national and local banks to lend for them to retain commercial banking relationships with the healthcare facilities. Therefore, the hospital can go to such financial institution in case of financial difficulty and work out an appropriate plan regarding the amount to be borrowed and the time to pay the loan.
The hospital will have two options when it comes to direct bank loans. First, the investment may be tax-exempt in which case a higher authority such as a city or local authority can be the conduit agency for the debt (Choi, 2017). In this case, the loan will be tax-free. The second option is the taxable type which entails the hospital dealing directly with the bank without a third party (Stichler, 2009). This option could work best for situations that require urgent funds as the process of going through third parties is lengthy. The short-period loans range from three to 10 years, and they can span form between $10 million and $50 million. Therefore, a healthcare facility can benefit in times of financial crises.
Municipal Bonds
A municipal bond is debt security given out by organizations such as a hospital, learning institutions, cities, and counties to bondholders who issue a loan to fund a particular institution (Bem, Prędkiewicz, Ucieklak-Jez, & Siedleck, 2015). The loan given out to the institution is expected to be paid in a given period. It may be paid once every six months. The basic principle that hospital borrowers require to qualify for the bond is its standards must attain public rating.
There are two types of municipal bonds; general obligation bond and revenue bond. General obligation bond is usually issued by governmental institutions such as counties, states, and cities. These issuers have revenue power and so have a total guarantee to repay the bond no matter what the circumstances may be (Bem et al., 2015). In revenue bonds, the profits from the project that was funded by the bond are used to repay the debt. In this type of bond, investors have to be aware since the issuers will do whatever possible to raise fund to refund the bond. In this case, they may raise the price of accessing hospital services to come up with the money. However, this will not guarantee high revenues for the hospital since patients may opt to seek medical services from other health cares that offer less expensive services.
Issue Equities
Since PrimeCare is an established and renowned entity, it can issue equity stock to the public in times of acute financial crises. This option is appropriate, especially when the business feels like getting into a significant investment that seems to suit the prevailing market conditions (Choi, 2017). In such cases, clinching such opportunities could turn around the hospital revenues, and missing out on them could give the competitors an upper hand. Giving other organization or individual equity in the hospital will mean that such parties will be entitled to a particular share of the hospital revenues for as long as their share of investment is under the hospital’s management.
PrimeCare can utilize Equity stock for its financial problems since this kind of funding favors big companies. The situation arises such entities have a long performance record and positive public reviews to enable the investors to make sound decisions (Bem et al., 2015). For such organizations, it is easy to project where they are heading and the likelihood of their suggested projects making the expected profits. In this case, if the hospital presents a slid idea to the investor, they are likely to support it promptly.
The best option in case of a financial shortage
PrimeCare should consider taking a direct bank loan in case of a cash shortage later in the year. The choice comes with various benefits in terms of the amount likely to be accessed and the period taken for the funds to reach the hospital. The option does not require any public rating for the funds to be approved. In this manner, the hospital will sue its performance record and strategic plan to convince the bank to offer the loan. Additionally, the debts can be issued by a wide array of financial institutions; thus, the hospital has a chance of getting funds from different banks. Finally, the hospital will not have to worry about put risk that comes with bonds or control of investor that comes with the issuance of equities.
References
Bem, A., Prędkiewicz, P., Ucieklak-Jeż, P., & Siedleck, R. (2015, June). Profitability versus debt in hospital industry. In European financial systems 2015. Proceedings of the 12th international scientific conference (pp. 20-27).
Choi, S. (2017). Hospital Capital Investment During the Great Recession. INQUIRY: The Journal of Health Care Organization, Provision, and Financing , 54 , 0046958017708399.
Stichler, J. F. (2009). Capital planning and debt financing in uncertain times. HERD, 3 (1) 38-40.https://doi.org/10.1177/193758670900300105
Management Today (2018) Debt finance: an alternative to equity for growing start-ups? There are options for founders who don’t want to dilute their holdings. Retrieved from https://libraryresources.columbiasouthern.edu/login? url=http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=131515302&site=edslive&scope=site
