Essay on American Hospital Corporation
Hospital Corporation of America (HCA) is a proprietary hospital management company. The company has been following an acquisitive strategy by taking over hospital companies and not-for-profit hospitals. The firm is also considering expanding into new health service areas like home health care and outpatient surgery.
The company is at a crossroads with regard to its financial goals; HCA currently faces the likelihood of adverse changes to the Medicare/Medicaid policy which could strain the company’s profitability along with a substantial increase in financial leverage risks coupled with an increase in required expenditure to reap the effect of prospective operating synergies like economies of scale and scope from the …show more content…
Appendix 3 shows the link between the firm’s financial strategy and the product-market strategy for each time period. The company was in its start-up phase around 1970, when it acquired and constructed hospitals. However, internal funds were not sufficient to invest in potentially profitable acquisitions. Also the industry was relatively new, so the cost of equity would have been too high. Hence the company preferred to issue debt instead of equity given the shortage of internal funds in accordance with the Pecking Order Theory (Brealey, Myers, & Marcus, 2009).
From mid 1970s to 1981, different types of financing were used due to the changed strategy during this period as mentioned earlier. So despite the fact that HCA’s internal funds had increased significantly over the years, they were still not adequate to fund the increasing number of prospective profitable acquisitions during this period. Therefore the company had to rely on medium term floating rate debt to long-term first-mortgage bonds in addition to equity issues as well now that the company’s reputation was established.
From 1982 onwards, HCA should use more floating rate debt to finance further expansion of its existing business into new health services