Creditworthiness in the Healthcare Industry

Creditworthiness

A major problem facing the United States' health care organization is surplus capacity (Stanko, 2011). Unreasonable investment in equipment and plant usually leads to lower profitability in the health care marketplace (Stanko, 2011). Health care leaders use the total asset and fixed asset turnover ratios to assess usage of fixed assets. Most health care organizations incur debt and borrow capital on a regularly to survive in the market (Wareham & Majka, 2003).

Heath care organizations require resources to successfully function. One of the most important resources of a health care organization is capital (Egger, 2001). The health care organization's board and management team must maintain a minimum credit rating that permits the organization to compete effectively in its marketplace. Credit ratings do matter.

A health care organization's durable position is dependent on the organization's capability to increase capital in the debt markets (Wareham & Majka, 2003). The long-term position also depends on the organization's creditworthiness and credit rating. "An organization's creditworthiness is a function of a number of factors, including historical financial performance, market position, governance and management, strategic and financial plans, net debt position, size, payer mix, physician relations, and debt legal structure" (Wareham & Majka, 2003, p. 11). Financial performance and net debt position indicate a health care organization's capability to pay back debt (Wareham & Majka, 2003). A rating organization's focal point is on cash flow created from key ratios and on the core operations. In regard to revenue, rating agencies reviews the health care organization's influence in negotiate contracts in the market, payer mix, and reimbursement terms. The market position entails determining the level to which the health care organization manages the marketplace, namely the services offered, size, the presence of formidable competitors, and market share. A health care organization's management and governance roles are assessed closely. Effective management is vital to creditworthiness. The health care organization's liability official structure is essential to protecting bondholders. Inadequate covenants, subordinated bondholder protections, insufficient continuing disclosure, or weak security provisions in bankruptcy increase risk (Wareham & Majka, 2003).

Creditworthy health care organizations have access to taxable or tax-exempt debt, less restrictive security provisions, and less restrictive bond document covenants. Creditworthy health care organizations with high credit ratings experience lower issuance costs and lower interest rates and have a lesser cost of capital. Creditworthy health care organizations are market consolidators: they are the attractive partners, they have excess capital capacity, and they make use of the low cost capital to defend their market position (Wareham & Majka, 2003).

Financial statement analysis is important to health care leaders who make decision about the monetary health of the organization. Ratio analysis is one of the accepted methods of reviewing the financial statements. The ratio analysis apply data from the income statement and the balance sheet to create values that have financial meaning that is easy to understand (Financial indicators for critical assess hospitals, 2005). Most health care organizations regularly evaluate the financial condition by calculating various ratios and searching for variations that show a significant adjustment in the financial condition. Also, many health care organizations evaluate their own ratio values to those of similar organizations, searching for variations that could show openings for enhancement. Ratio analysis expresses the relationship between two or more accounts in a more comprehensive way. Ratios are derived from financial statements as a basis of prediction, comparison, and evaluation. It is important to focus on the amounts that are related.

Creditworthiness of a health care organization is established by its financial operation (Wareham & Majka, 2003). Health care leaders' focal point is on the ten ratios that offer analysis into the liquidity, physical plant, profitability, and leverage. The profitability indicator is the operating EBIDA margin, the excess margin, and the operating margin (Wareham & Majka, 2003). The operating margin reveal the profitability of an organization, while the operating EBIDA reveal the cash flow created from operations less capital operating expenses as a percent of total operating revenues (Wareham & Majka, 2003). The operating profit margin could be used to determine the financial viability of a health care organization. The excess margin includes expense and revenue from non-operating activities, such as charity, and defines profitability from those operations. A health care organization should profit from the business of providing health care services (Kaufman & Kaufman, 2006). Not many health care organizations can increase their operating margins with proceeds from donations. A health care organization that is incapable of constantly generating profits from operation will face relentless problems financially (Kaufman & Kaufman, 2006).

Liquidity is most commonly evaluated using days cash on hand ratio (Wareham & Majka, 2003). Days cash on hand show the prospective long-term success of the organization. Despite the size of the facility, if a health care organization cannot constantly create a reputable, net positive cash flow from