Analysis of Capital Structure Strategies in Health Care Finance Report

This report analyzes the capital structure strategies within the Health Care Financial System, focusing on Mercy Hospital. It examines the importance of financial capital for healthcare organizations, including sources like grants, operational funds, debt instruments, and philanthropy. The report delves into capital structure theory, exploring approaches such as Net Income, Net Operating Income, Traditional, and Modigliani and Miller. The report then analyzes Mercy Hospital's capital structure, highlighting its non-profit status and sensitivity to profitability. It discusses the advantages of debt financing, such as tax exemptions and access to capital markets. The conclusion recommends debt financing for Mercy Hospital due to its cost-effectiveness and tax benefits. The report references several academic sources to support its analysis, offering a comprehensive overview of capital structure in healthcare finance.

Running Head: HEALTH CARE FINANCE
HEALTH CARE FINANCE
Name of the Student
Name of the University
Author Note

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Capital Structure Strategies in Health Care Financial System
The aim of this assignment is to do the analysis of the capital structure strategies in
the Health Care Financial System.The structures of capital of the leading health care systems
are generally viewed as the strategic components of the financial plans.For any health care
organization, accessing to the financial capital is the important part, which would respond to
the changes in their community, acquisition of the new technologies, replacement of the old
equipment, offering new services or programs and many so on. Therefore, much of the
attention is given on the future aggregates needs of the hospitals for the financial capital. The
sources of the capital funds of the health care providers are grants or the other appropriated
money granted by the government, funds that are accumulated from the operations from past,
sales of the short and long-term instruments of debt, philanthropy as well as sales of the
ownership certificates (Baker, Baker & Dworkin, 2017). Moreover, as the group of hospitals
for not-fir profit has maintained the constant levels of the debt over the last few decades, the
hospitals that are investor-owned as well as the group of the leading health care system has
able to reduce the relative use of the debt. In addition to the reduction of the debt due to less
favorable incentives of reimbursements, the focus has been maintained on the high ratings of
the bond. The levels of the debt has been reduced sharply in these systems of health care as it
has in hospitals of investor-owned because part of the debt uses is done for supporting
investments in the financial markets. These are the systems of the health care that does not
have easy access to the equity; ratings of bond as well as earnings of central investments are
considered as central to their policies of the capital structure of the preservation for accessing
to the debt market (Ginter, Duncan & Swayne, 2018).
a)
PROJECT NAME

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ORGANIZATION NAME: MERCY HOSPITAL
BUSINESS ADDRESS
CITY, ST, ZIP
TELEPHONE NUMBER
FACSIMILE NUMBER
WEBSITE ADDRESS
EMAIL ADDRESS
b)
Capital Structure Theory
Capital structure is the debt amount or the equity, which is employed by the firm for
funding their operations as well as financing their assets. It is the way the company finances
their overall operations as well as growth with the help of using the different sources of the
funds. Debt is in the form of issuing of the debt or the long-term notes payable, however, the
equity is in the form of the preferred stock or the common stock. Moreover, the capital
structure theory is the systematic approach that finances the activities of the business by the
composition of the liabilities and the equities. Different theories of the capital structure
explains the relationship between the equity financing, debts financing and the firm’s market
value (Hugonnier, Malamud & Morellec, 2015). Following are some of the theories of capital
structure:
 Net Income Approach: Durand has suggested this approach, as he was in the favor
of the decisions of the financial leverage. As per his approach, the changes in the
financial leverage would be changing the cost of the capital. If there is increase in the

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debt ratios of the capital structure, there would be decreases in the weighted averages
cost of the capital and hence the firms’ value decreases (DeAngelo & Stulz, 2015).
 Net Operating Income Approach: If the tax does not exist, then this approach is just
contradict to the Net Income Approach. It assumes constant WACC. If the
information of tax is given, then there is the recommendation that WACC reduces
with the increase in the debt-financing as well as increasing in the firm’s value
(Zeitun & Tian, 2014).
 Traditional Approach: Under this approach, it believes in the optimal capital
structure that assumes that at the ratio of the debt and equity, there is minimum cost of
the capital as well as maximum value of firm.
 Modigliani and Miller Approach: Under this, two propositions have been proposed
by MM. Proposition I make the assumption that there is irrelevant capital structure to
the firm’s value. The firm’s value is dependent upon the expectations of the future
earnings, in case when the tax does not exist. Further, Proposition II makes the
assumption that firm’s values is boosted by the financial leverage and reduced by
WACC, in case of the availability of the tax information (Monteforte & Staglianò,
2015).
The company’s capital structure is considered as one of their most important choices.
From the perspective of technical, the structure of the capital is considered to be the balance
between debt as well as the equity, which is used by the business for financing their assets,
future growth and the business operations of day-to-day. Moreover, from the perspective of
tactical, everything is influenced by it from the risk profile of the company, how easily the
funding gets, how much is the funding expensive, the expectations of the lenders as well as
investors as well as the degree of its insulations from both of the business decisions of

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microeconomics as well as macroeconomics downturns (Mwangi, Makau & Kosimbei,
2014).
c)
Capital Structure Strategy of the Leading Integrated Health Care System
Mercy Hospital is the not-for profit organization of Catholic health care that is located
in the United States of Midwestern. As it is the NFP organization, it occupies different niches
of the market from the peers of investors owned. This organization directly competes with the
investors owned organizations for the patients, revenues, providers for attempting to preserve
the profitability as well as margins (Muritala, 2018). Therefore, the choices of financing the
activities have great impact on pursuing of the different types of the projects and the
respective stakeholders. However, these decisions are influenced by the costs of agency and
are highly complex. Mercy hospital structures its capital structure that are not sensitive to the
risks rather they are more sensitive towards the profitability (Whittington, 2014). The growth
of this organizations requires more base of the assets that demands more use of the debt as
the size and growth of the organization have distinctly have different relationships for using
the debt. This source of the financing has generally the benefit of tax exemption. For the
hospitals, debt of tax exempt has become one of the single largest sources of the financial
capital. The bonds that are tax-exempt have opened up the market for the occurrences for the
small issues and it will be making it easier for securing the loans (Dawar, 2014). It is because
pledges of the earnings can be used rather than the assets, which the commercial banks
generally require. The incentives that are provided for using the debt sources of fund is the
reimbursement of the expenses of the interests as well as the reimbursement of the expenses
of the depreciation that helps the hospital for creating the internal reserves, which would be
used as internal reserves that would be leveraged in the capital market (Serrasqueiro &
Caetano, 2015). The advantage of using this capital structure where there is more debt and

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less equity, takes the advantage of the cheap debt that would be helpful for maintaining the
stock of cash as well as supporting the financial investments as well as maintaining the access
to the markets of the debt in future on the good terms. The maintenance of the access to the
debt market is related closely with pursuing the objective of minimization of the overall costs
of financing (Robb & Robinson, 2014).
I conclude after the thorough analysis that the non for profit healthcare, the decision
of the capital structure is one of the most vital decisions among all the decisions taken by the
organizations. Mercy hospital, which is the NFP organization, cannot raise equity by selling
the stocks by public issue. Moreover, their sources of equity are restricted to the retained
earnings from the operations, donations as well as income from the investments. I have found
during the analysis that the strategy of the capital structure as well as overall financing costs
have implications for the deployments of the assets. Therefore, as per my suggesting if they
plan to use debt financing structure of capital then in that case it would be highly beneficial
or them as it is cheaper sources of fund and the organization would get the benefit of
exemption of tax. Hence, I suggest Mercy hospital for using debt financing as the source of
their financing.

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Reference
Baker, J. J., Baker, R. W., & Dworkin, N. R. (2017). Health care finance. Jones & Bartlett
Learning.
Dawar, V. (2014). Agency theory, capital structure and firm performance: some Indian
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Ginter, P. M., Duncan, W. J., & Swayne, L. E. (2018). The strategic management of health
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Hugonnier, J., Malamud, S., & Morellec, E. (2015). Credit market frictions and capital
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