The Cost of Capital, Leverage, and System Membership: Does System Membership Help Hospitals Achieve Optimal Leverage?

Abstract

The hospital industry is again experiencing a wave of consolidation as formerly independent hospitals are acquired by multihospital systems. The effects of these consolidations on operating costs and care quality have been researched extensively. However, in addition to these benefits, many hospitals also hope that joining a multihospital system will improve their access to capital. Improved access to capital could be a particularly important benefit for independent, not-for-profit (NFP) hospitals because these hospitals face capital constraints since they lack access to publicly issued equity. Despite being an often-cited benefit of system membership, access to capital has received little attention from researchers. We draw on financial theory to identify several mechanisms through which system membership might improve access to capital for acquired NFP hospitals. We develop and test hypotheses using data from an earlier period of hospital consolidation during which hospitals were even more financially constrained than they are at present. Using propensity score matched control hospitals, we examine changes in leverage that occurred after independent hospitals joined multihospital systems. We find evidence that system membership allows under-leveraged hospitals to increase their debt holdings, suggesting that system membership may help NFP hospitals attain an optimal capital structure.

Citation

Carroll, N.W., Smith, D.G. and Wheeler, J.R.C. (2020), "The Cost of Capital, Leverage, and System Membership: Does System Membership Help Hospitals Achieve Optimal Leverage?", Hefner, J.L., Al-Amin, M., Huerta, T.R., Aldrich, A.M. and Griesenbrock, T.E. (Ed.) Transforming Health Care (Advances in Health Care Management, Vol. 19), Emerald Publishing Limited, Leeds, pp. 61-74. https://doi.org/10.1108/S1474-823120200000019008