Health Econ. – Capital Financing Hospitals

When it comes to investing people tend to not put all their eggs in one basket they tend not to invest just in one specific area because if that one specific area does poorly that you know then everything goes bad everything goes south and the larger part because that people tend to diversify they tend to invest in a lot of different areas and those areas they

Can look at areas that have would have called independent or uncorrelated risk that’s where there’s a risk in one area that is it doesn’t affect another so for example we’re gonna have uncorrelated risk would be investing and say mcdonald’s and a chain of massage parlors affecting one doesn’t affect the other something that can negatively impact one wouldn’t

Necessarily negatively impact the other when risks are the same however they’re called correlated risk so that would be investing in mcdonald’s and burger king and so chances are something happens that negatively affects mcdonald’s it’s also going to negatively affect burger king so people tend to eye dirt diver spy and to be safe they tend to go in areas that have

Uncorrelated risk an example of this is within health care is nursing homes versus drug companies and when you think about which one is riskier investments you know which one is more likely to fail you would think all right well probably drug companies because drug companies there’s a lot of research and development and if they don’t succeed then that that research

Doesn’t succeed is a lot of wasted money and so a lot might fail evidence doesn’t support this however drug companies in general seem to be very strong whereas nursing homes there was a lot of them went bankrupt in the 1990s and the difference is comes down to this uncorrelated versus correlated risk so drug companies they diversify they they couldn’t research –

A lot of different areas they have a lot of different types of drugs so when if one of those drugs fails right then they have another one or more that are allowed to pick up the slack and so this diversification allows for uncorrelated risks nursing homes on the other hand have correlated risks they are basically all run by the same machine which is medicaid and

When medicaid and medicare cuts were cut in 1997 a lot of nursing homes felt the same problem and share that risk and they close because of that so when we look at risk in general there’s three types of business risk the first type of business risk and a business risk is risk in opening a new business the first one is revenue revenue is the biggest risk out there

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You start up a business are you gonna have enough money coming in you know you open a business there’s the chance that people just won’t want to come there and so you could have a lot of huge or not revenue coming in on that business and so you know the revenue risk is gonna be high in a lot of cases especially when you talk about restaurants a lot of restaurants

If it doesn’t take on or doesn’t take the people they can now that people coming into them do it the quality necessarily with location it might speak people just don’t go there so medicine on the other hand doesn’t have a great revenue risk because with medicine it’s not driven by preferences or tastes it’s driven by need and on top of that people have insurance

And they’re always gonna have insurance now the age of uninsurance rate may fluctuate and you know what happens with polĂ­tica politics of it but for the most part there’s it’s not a very risky on the side of revenue the second type of risk is operating expense risk and this is x this is risk of whether or not the cost of doing business will change whether not

Your expenses could skyrocket and we’re gonna see this be the biggest is anything with transportation because the transportation you need fuel and fuel costs are constantly changing and so airlines can have pretty high operating expense risk medicine not really medicine really doesn’t have those same risks either medicine there’s not a lot of changes in the cost of

Materials for the most part it’s usually steady and even third type of risk is financial leverage which is how much leverage you have to take out to get a loan to start your business do you have to put up your home or your car or whatever else and medicine this is the one case where the medicine is not really that much different than other but because the revenue

And operating expense risks are relatively small yes that financial leverage risk is the same but overall the business risks tend to be lessened when just one physician is starting a practice that physician has all the debt and make it all the revenue so everything is there and as the business grows the that person has to make decisions off any initial investments

Any kind of growth if the gains will outweigh the costs now as more physicians are hired or as more physicians start together those debts those revenue it could spread out between more and more people and it’s really in the structure where it determines you know who is responsible for the debt who’s getting me who’s getting the revenue who’s reaping the rewards

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And with corporations for example if corporation is formed you know the partners are protected you know the personal assets are protected whereas with partnerships and sole proprietorships it’s not necessarily the case now when it comes to who owns the business and the patient’s sole proprietorships and partnerships you know it’s everything is on the owners with

Corporations however it’s a little bit different because with corporations the physicians are the ones who are making those decisions but they’re not necessarily the owners and so there can be a large difference a large difference in goals between the owners who are the shareholders of the company and the decision makers who are the physicians and so that’s where

We get what’s called agency and agency is when one party makes decisions on behalf of another one and the most common example of this is when you have a store owner and you have the manager of the store where the manager makes decisions on behalf of the owner because the owner is one who is the one who’s going to be better or worse off because of those decisions so

With hospitals that can absolutely be an issue when the owners might want to cut costs and maximize revenue while the doctors may want to do its best for the patient and so there can be issues within there within the healthcare field financial intermediaries you know financial intermediaries are out there too because they can do a task cheaper than somebody else

So by doing this it helps to reduce costs and so if there was no insurance everyone had to go directly to the doctor or the hospital to figure out payment and all that then there could be a lot more time and effort spent onto that but intermediaries in general you know they can kind of look at the big picture make decisions and have the overall this is made there

Because they can see everything within the healthcare industry the health of chores are those financial intermediaries they take cash via premiums and paid out by reimbursed so within another nothing talking about is capital financing when it comes to hospitals hospitals are just like other business that need total revenue must be greater than total cost however

With hospitals their operating costs need to be relatively low compared to the revenue that they’re bringing in so we discuss at different points how the charges are greater than cost reimbursement when it comes to a patient getting charged money and one of the reasons why is because with hospitals they have such high cost in the front end because the bill bet

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Hospital attack takes a lot of startup costs and they need to recoup those because of it now the one benefit of hospitals is that they tend to have a very very low revenue risk because of medicare and medicaid and such high levels of private insurance they basically have guaranteed payment by a lot of that people to come in now the medicare medicaid made financing to

These hospitals easier because the bank said alright look they have guaranteed payment they have nothing to worry about great the problem was that this kind of got taken to an extreme in the 80s so in the 1980s hospitals are getting built at a very very rapid pace well because of that they tend to be over built and even though there was guaranteed payments because

People only had don’t only need to go to one hospital and it was only on a per need basis that you know everything got spread so thin that there really wasn’t enough demand for overall for all that and so there ended up being a lot of bankruptcies as a result hospitals they’re both for-profit and nonprofit their boats out there the nonprofit’s however they lack

Ownership so while a lot of times for-profit and nonprofit both make the same types of decisions when it comes to cutting costs nonprofits do not have the incentive to invest in capital gain to try to grow so it can be it’s there are some there are some issues there with that but in for profits they’re possible they’re profitable and studies have shown this the

There are some differences between for-profit and nonprofit as far as patient outcomes though for profits tend to have large longer lengths of stay but fewer visits while nonprofits tend to be less efficient and they don’t put money into quality as much charity care is available doctors donate their time the idea of for-profit and not-for-profit which is better it

Really depends it depends what you’re looking for costs versus quality you can really depend on the specific area and the problem medical care in general and the financing part of it is that it’s difficult to measure there’s a lot of risk there’s a lot of information that’s not known and you know it’s rich versus poor who gets what and so there’s a lot that goes

In there but in general capital financing especially looking with hospitals it’s very complex and there’s a lot to look into at least relative towards other industries

Transcribed from video
Health Econ. – Capital Financing Hospitals By Joseph Shinn