calculating cost of capital for asset-based financing for not-for-profit
community health systems was relatively straightforward. The tax-exempt debt
markets set the index rate and all other forms of capital were comparatively
more or less expensive based upon simple and straight forward calculations of
differential cost-to-borrow rates. A ten dollar calculator and one introductory
finance course was all that was required. Furthermore, U.S. accounting
standards favored long-term, tax-exempt debt over “more expensive” alternative
capital access options such as third-party leasing.
care leaders, strategists and finance officers are challenged to broaden their
perspectives on the consideration related to cost-of-capital evaluations.
accounting standards are likely to move closer to the international standards.
As a consequence, the comparative differences between the accounted costs of
tax-exempt debt-financed facility assets and the accounted costs of leased-financed
facility assets will change, making the lease option arguably more attractive
than in the past (a).
to geographic targets becomes strategically useful, especially as it relates to
staking-out key markets with larger, more sophisticated outpatient service
sites. What is the real cost of losing a market, because tax-exempt debt
capacity was constrained when the opportunity presented?
is “long-term” when considering the useful life of an expensive facility asset?
Is every location a 25-30 year strategy? What value is there in preserving the
right (by lease) to exit an unproductive market (and facility asset) by way of
favorable lease termination rights?
is the value of preserving balance sheet liquidity for tactical opportunities
such as mergers, acquisitions and physician integrations?
useful are historic standards of financial strength based upon scaled metric
comparisons among peers e.g. “we are at the 70th percentile for days
cash-on-hand within our peer group”. Absolute cash liquidity is most important;
especially if many in the peer group are sinking.
is the real weighted average cost of capital (WACC) when bond covenants and
bond rating agencies require significant levels of capital “lock-ups” to
satisfy the risk requirements of tax-exempt debt sold to markets expecting
stable, low-risk, tax-free returns.
evaluations of balance sheet positions and true costs of capital in the
healthcare markets ahead are not simple math problems anymore. And, timely
execution of strategic asset development and deployment will require health system
leaders to step out of their hard asset financing comfort zones.
(a) Zismer, D.K., Fox J.,
Torgerson, P.; “financing strategic healthcare facilities – the growing
attraction of alternative capital”; hfm, May 2013