Market, Strategic and Financial Factors - Essay Example

? s Topic s` Introduction According to Answer.com , debt financing is a process of raising money to a firm throughselling bonds, mortgages, notes and borrowing from the public. In today’s world, most health care organization borrows capital with incurrence of debt to help them compete efficiently in the market. As a result, the health care management need to carefully select the choice they considers best in providing debt and on how easy or effective to implement it ( Therese, Andrew, Kufman, Hall & Associates Kufmanhall.com, 2013). Consequently, when health care organizations incorporate debt financing to it capital structures, it gives a financial leverage that increases the operating profits to stockholders return. Moreover, debt is the cheapest source of financing for long-term since it provides deductibility of interest proportion to tax and during inflation, the rate of debt repayment is cheaper. Moreover, the capital access will help to keep this facilities updated with information, technology and improve the quality initiates. However, once considered in higher levels, it will pose financial risks in the attempt to meet interest repayments and the principal. Accordingly, it becomes difficult in raising funds leading to elevated capital cost (Anwer.com, 2013). According to Fitch Rating CEO, John Well (2013), hospitals are becoming sophisticated by the use of complex debts to achieve lowered cost of debt but with certain risk of not all hospitals can afford to take the debts. As a result, Health Care Financial Management Association CEO (2013) suggests that their issue will not be different to personal investment and to avoid the succumbing to various risks, the management is being advised on scrutinizing debt structures and the current trends in the capital market. As result, they should always be considered as long as the returns it gives are much higher than its cost. Additionally, for the usage of debt to be effective, the management in health care organizations needs to know the current changes in capital market and the currently available types of finances (Lee, 2013). Case Scenario Market, Strategic, and Financial factors Improve a Hospitals Credit Rating Moody Investor Service, (2009, as cited in William, Michael, & Noah, 2009). According to William, Michael, & Noah, (as cited in Moody Investor Service, 2008), Moody Investor Services improved the credit rating of tax-exempted bonds of Evanston Northwestern Healthcare from Aa3 to Aa2. According to them, they cited improvements to have been achieved from improved factors such as market, strategic and financial aspects. As a result, Evanston has expanded in various sectors such as the patient base since it has been able to align with several specialists’ medical groups. Moreover, it financial earnings has improved to a cash flow of 4.2 times payment at the debt service. As a result, in 2007, the hospital had managed to raise it cash flows to 10% compared to 2006, which stood at 9.4%. in fact, the accrued raised gaining were observed to have risen from the expanded medical group, more revenue from outpatient, and establishment of current, advanced technologies in information sector. Additionally, the hospital is cited to be maintaining strong positions of liquidity whereby the unrestricted and restricted capital sums up to $1.6 billion, which can be explained as cash on hand for 509 days. As William, Michael, & Noah, (2009, as cited in Moody Investor Service, 2008) suggests, Over the next few years, the hospital is expected to increase its capital outlay to be more than $100 each year. As a result, the capital will be used for expansions or replacement needed in care unit, operation rooms, and centers for treating cancer. However, William, Michael, & Noah, (2009, as cited in Moody Investor Service, 2008) concludes that Moody has a concern over the competition in hospitals that are increasing their service areas and Evanston depend only on commercial that have seen its patient revenue rising to 25%. Pros and Cons of Debt Financing over Equity Financing There are various advantages derivable from debt financing. Firstly, the borrower are allowed to retain the ownership and control of the health care since the third party involved is only interested with profit and his principal without any money gaining interest. However, for the equity, the owners will have to part with some proportions of the ownership with surrendered autonomy of decision-making (Ronda, 2011). As a result, easier administration will occur since the firm will only have little management reporting and records updating depending on equity holdings. For instance, in 2006 HCA Inc. one of the largest hospital supply chain was owned by private equity Bain Capital through a payment of $33 billion (Berman, Naik, & Winslow, 2006). Secondly, the entrepreneur is allowed to retain earning without sharing with debtors because the debtors do not have any share on the profit unlike equity where they do. Moreover, there is aspect of tax deduction to interests borrowed and hence the business has a lowered liability when paying taxes unlike equity. As a result, debt financing is seen to give limited obligations to the debtors by only repayment of their debt. However, for the equity, not unless the partner sells out his stake, his obligations remain full. Moreover, this is seen In fact, it describes debt financing as timely repayment of debt and this enhances the firm’s future borrowing (Ronda, 2011). Lastly, the future planning will be easy to undertake since the principal and associated interests are calculated beforehand. Hence improves forecasting. Moreover, the overall look will be less expensive and the health care organization can meet the liability cost in short time unlike equity (Ronda, 2011). On the other hand, there are disadvantages associated with debt financing. For instance, the debt must be repaid without caring whether the firm makes a profit or loss. However, for the equity, repayment is made on health care performance over the year. Additionally, the interests associated may end up paralyzing the gains for the health organization to a point of break even. Moreover, it will lead to restricted cash flows since debts must be repaid leading to raised risks of insolvency. Consequently, it will affect the budget by since the cash flow must account for the debt and it associated profits (Ronda, 2011). Besides, it will impose restrictions on borrowing since the involved firm can never borrow until it clears the former debts not like equity financing. On top, it will require restrictions as the covers on the value of loan and lastly, it will portray a riskier outlook since it will have higher debt equity ratios (Ronda, 2011). E activity The financial statements that I am to evaluate include Medicaid Managed Care Plans. Because of internet analysis, the below is the breakdown of component cost and the overall corporate cost (Michael & Michael, 2011). Plan enrolment by type Total enrolment For profit Non profit Total 23.8 million 14 million 9.8 million Ownership status i. Pure play publicly traded ii. Multiproduct publicly traded iii. Non publicly traded i. n/a ii. n/a iii. n/a i. 4.8 million ii. 5.0 million iii. 4.2 million i. n/a ii. n/a iii. n/a Affiliation status a. provider sponsored b. non-provider sponsored a. 4.8 million b. 19.0 million a. 1.6 million b. 12.4 million a. 3.2 million b. 6.6 million a) Medicaid focused b) Non Medicaid focused a) 16.4 million b) 7.4 million a) 9.2 million b) 4.8 million a) 7.8 million b) 2.6 million There is an overall 170-health plan that needs to be computed in order to measure the health plan. Moreover, there are three ratios for analyzing firm’s financial performance that include medical loss ratio, administrative cost ratio, and operation ratio. As a result, medical loss ratio plays a significant role in determine expenses required in each year, administrative ratio portrays the necessary expenditures incurred during management and the operating margin ratio describes the pretax operating income (Michael & Michael, 2011). Additionally, through use of balance sheet and cash flows, it has been possible to determine the needed operating cash flow for each member in a month together with the ratio between cash and investment in relation to unpaid claims (Michael & Michael, 2011). Reference William N. Z., Michael J. M., & Noah D. G. (2009). Financial Management of Health Care Organization. An Introduction to Fundamental Tools, Concepts, and Applications. USA: John Wiley & Sons Ronda B. (2011). Bright Hub. Advantages and disadvantages of debt financing. Retrieved on 26 May 2013. Retrieved from: http://www.brighthub.com/office/finance/articles/70771.aspx Lee A. R. (2013). H&HN- Hospital and Health Networks: Debt Financing. Retrieved on 26 May, 2013. Retrieved from: http://www.hhnmag.com/hhnmag/jsp/articledisplay.jsp?dcrpath=HHNMAG/PubsNewsArticle/data/2006June/0606HHN_FEA_Gatefold&domain=HHNMAG Answer.com (2013). Barron’s Accounting Dictionary: Debt Financing. Retrieved on: 26 May, 2013. Retrieved from: http://www.answers.com/topic/debt-financing Therese L. W., Andrew J. M., Kufman, Hall, & Associates Kufmanhall.com (2013). Best practice financing. Retrieved on 26 May 2013. Retrieved from: http://www.healthleadersmedia.com/content/127346.pdf Michael J. M. & Michael H. B. (2011). Assessing the financial health of Medicaid managed care plans and the quality of patient care they provide. Retrieved on 5 May 2013. Retrieved from: http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2011/Jun/1511_McCue_assessing_financial_hlt_Medicaid_managed_care_plans_ib_FINAL.pdf Read More