Hospital Corporation of America

Abstract

In the early years, the hospital industry in the United Stated was in dire need of better management. The enactment of entitlement programs enhanced the demand for hospital services and eliminated the bad-debt burden that had posed tremendous challenges to the hospital industry. With this in place, an opportunity was created for private investors to to build/acquire and manage hospitals for-profit purposes. A national proprietary hospital management company, Hospital Corporation of America, was founded in Nashville, Tennessee for the acquisition and management of hospitals for profit.

Hospital Corporation of America

     Since its inception as a proprietary hospital management company, Hospital Corporation of America’s (HCA’s) main objective has been to offer highly competitive hospital management services.  As positive growth patterns continued, HCA’s management expected the growth trend continue through acquisition, construction of new hospitals, expansion of services and the signing of new management contracts. This led to a likely indication that the company would expand to new health areas such as home health care and outpatient surgery.

     As far as growth by acquisition was concerned, HCA was esteemed as the most promising and valuable by which to be acquired because of its industry leadership rank, decentralized management style and quality of its highly esteemed and nationally recognized corporate management team. HCA’s quality image countered all doubts in trustees of non-profit hospitals that it showed interest in to acquire. Most trustees kept the notion that proprietary hospital management companies were out to gain profit at the cost of those they were meant to provide crucial health services to. However, trust was easy for HCA to attain in the eyes of these trustees just by quality of the services they offered that ensured it maintained a good image. This made it easy for trustees to sell to HCA making its acquisition processes easier.

     Besides its growth goal, HCA also targeted a 60% ratio of debt to total capital. In the early years, debt was used to finance real estate development with a 75% loan to value margin. Since HCA’s hospital equipment project expenses accounted for 15%, its management decided to be conservative and use 60% of debt financing only for its hospital construction. The most important goals for HCA were to make returns on all investments with returns on capital expected to be not less than 11% after taxes while returns on returns on equity were expected to be higher than 17% after taxes. Sometimes these goals may have seemed a little challenging to maintain especially during periods of rapid growth most notably during growth by acquisition. This was said to be so since most hospitals that would be acquired would need a total turn around whose financial implications would not only squeeze the profit margins but take many years.

     HCA’s other goals were to pay out 15% of net income as dividends, maintenance or improvement of profit margins measured against the operating revenues, and the senior vice president of finance and chief financial officer’s desire to maintain the average interest cost for all HCA’s debts at 15% or less in the future. These goals and objectives would well be attained if HCA keeps the stipulated trend of financial and growth strategies. On bond rating criteria, HCA seemingly held a stable position that, though from time to time seemed challenging, would give the company the financial stability it needed to continue with its growth objectives. Compared to its competitors, HCA seemed to have a more stable leadership position attained through its positive image portrayal.

     HCA’s target capital structure was one issue that had to be addressed urgently so the company would maintain its bond rating position. By having a target ratio of 60% of debt to total capital, HCA’s critics wondered if this would be too high a rate to maintain. Rating agencies emphasized that HCA needed to go back to the 60-40 capital structure to maintain its A-bond rating. Meeting the rating agencies clearly indicated that HCA needed to resolve its debt ratio. Losing its a-bond rating would make it challenging for HCA to access the debt markets. However, through the acquisition of Hospital Affiliates and the debt burden that came with the transaction, eliminated the stigma that Hospital Corporation of America was conservative.

     By maintaining the debt to total capital ratio of 60-40, HCA would have proven its flexibility to all its strategic moves. On the other hand, though maintaining a high level of leverage would cause HCA to lose its A-bond rating, the loss would have not been too costly or damaging. This means that making such a strategic and critical decision to maintain high leverage would still leave HCA in a strategic leadership position or with higher chances of success. Through general analysis and market target, Hospital Corporation of America’s management managed to make strategic decisions at the right time on the right investment.

     Acquisition of non-profit hospitals meant that proprietary hospital management companies had to face the challenge of bearing the full financial burden of a complete turn around on the acquired facilities. Most such hospitals needed high cost renovations that would seemingly cost a fortune to invest in and imply marginal/minimal profits for a long period of time. However, Hospital Corporation of America ensured that it was well cushioned both financially and image wise to aggressively take on the acquisition projects of such facilities. This on the other hand ensured that HCA maintained its leadership position as a proprietary hospital management company.

     Aggressive growth was one of Hospital Corporation of America’s (HCA’s) main survival tactics that saw it gain great respect among its competitors. Practically, HCA sought for an aggressive growth rate of between 25% – 30% including inflation effects. This was one strategy sought by HCA’s management to ensure that growth opportunities would be taken without delay as soon as they were noticed. Since inception, HCA had sought to maintain a good and competitive growth rate that would ensure continuity of operations in all economic seasons.

     Success and market leadership were some of the main objectives that Hospital Corporation of America’s management sough and successfully seemed to attain at all times. This was one of the main reasons for maintaining its positive image among many trustees of prospective hospital or health care facilities that HCA sought to add to their managed facilities base. All-in-all, one cannot go without saying that Hospital Corporation of America has proven to be a highly competitive and successful proprietary hospital management company that would take on its competition at any project and opportunity.

 

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