Long term debt alternatives for hospitals - Article Example

Hospital financing has never been so easy. With lots of options to choose from and government’s encouraging policies to back upon, the financing part of the hospital has become organized and comfortable for all the involved parties.Once the proposed hospital’s capital has been decided, the desired method of the capital funding needs to be determined. In the US hospital industry, approximately 50% of the assets are financed through equity and 50% through debt. Long term debt financing is available from at least four major sources: tax-exempt revenue bonds, Federal Housing Administration insured mortgages, public taxable bonds, and conventional mortgage financing.

To obtain debt financing, hospitals must maintain a certain level of financial performance as measured by various ratios of assets to liabilities or income to expenses.The two prominent long term debt alternatives for hospital are:1. Conventional mortgage: A mortgage in which the interest rate does not change during the entire term of the loan and that is not insured or guaranteed by the government. Interest rate is the rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal.

It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%. 90/1000 *100% = 9%. Lenders typically require a down payment of at least 20 percent on a conventional loan, although you can get a loan with a down payment of 3 percent or even less if you are willing to pay private mortgage insurance (PMI).

PMI protects the lender if the owner defaults on the loan. Conventional mortgage loans are typically fully amortizing, meaning that the regular principal and interest payment will pay off the loan in the number of payments stipulated on the note. Most conventional mortgages have time frames of 15-to-30 years and may be either fixed-rate or adjustable. While most mortgages require monthly payments of principal and interest, some lenders also offer interest-only and biweekly payment options. 2. Taxable bonds Over the past 15 years, hospitals have invested large sums of money in physician practices and various joint ventures with physician groups.

However, these funds come with a catch: control over whatever the hospital has invested in typically is required to stay with the hospital. In many cases, this has created a lot of tension between the two entities -- and this is where bond financing comes in to play. Bonds carry lower rates of interest than bank loans and permit physicians to retain control over their operations. Bonds are a form of debt which has a principal amount (or par value) payable at maturity and bears interest (the coupon rate) payable at certain intervals.

Bonds are similar to loans from a bank, except that bonds are typically longer in maturity (20 to 30 years) and are usually sold to third-party investors. Bonds can be taxable or tax-exempt depending on the tax status of the borrowing entity. A not-for-profit 501(c)(3) hospital can borrow on a tax-exempt basis (which affords lower interest rates) due to its nonprofit tax status, whereas, for-profit, private physician groups borrow on a taxable basis. Taxable bonds are issued by a physician group and sold to investors (by the group's investment banker) based on the promise of the group to repay the principal of the bonds and all interest.

Since third-party investors will probably not be familiar with the particular physician group, a commercial bank with a good credit rating serves as an intermediary to provide a credit and liquidity guaranty to the investors. The bank then