Does adding debt increase or decrease the flexibility of a healthcare provider? Why?
Solution
Firms need financial sources to grow. The sources include equity funds and debt funds. Debt financing is borrowing money from outside sources to run the business. The financing can be in the form of bank loans, bonds, financing of receivables, equipment leasing etc. Basically debit financing has two components of payment viz., periodical interest payment and the repayment of debt after a pre-determined period. Debt financing has its own advantages like access to funds without any compromise on ownership, tax deductions on interest payments, lower interest rates. It also inculcates the financial discipline in the borrowing organisation as it needs to make repayment of debt obligation failing which the entity may be forced to go into bankruptcy. Revenue sources of health care providers are mainly from services provided to patients in the form of receipts from insurance companies and private payments.
Most of the hospitals are operated as non-profit organisations and are scrutinised by several organisations like donors, Health Administration etc. Under these circumstances debt financing adds additional burden on these organisations in the form or additional scrutiny, pledging of assets to secure loans which needs several clearances, payment obligations from sources which are limited. The organisations also need to keep a strict control over its costs in order to maintain the cash flows to meet the debt obligations. Hence there is a possibility of reduction in charitable treatments or treatments offered at a reduced cost to the patients. Also those which are non-tax paying entities find the attraction of tax exemption of interest payments is not available to them.
However the debt financing do have some benefits for health care providers. For example, equipment leasing is an option taken by many health care providers to buy hospital equipment. This is done to
Based on the general structure of the healthcare providers are not for profit organisations, adding debt do affect flexibility of the operations of the entity.
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Does adding debt increase or decrease the flexibility of a healthcare.docx
1. Does adding debt increase or decrease the flexibility of a healthcare provider? Why?
Solution
Firms need financial sources to grow. The sources include equity funds and debt funds. Debt
financing is borrowing money from outside sources to run the business. The financing can be in
the form of bank loans, bonds, financing of receivables, equipment leasing etc. Basically debit
financing has two components of payment viz., periodical interest payment and the repayment of
debt after a pre-determined period. Debt financing has its own advantages like access to funds
without any compromise on ownership, tax deductions on interest payments, lower interest rates.
It also inculcates the financial discipline in the borrowing organisation as it needs to make
repayment of debt obligation failing which the entity may be forced to go into bankruptcy.
Revenue sources of health care providers are mainly from services provided to patients in the
form of receipts from insurance companies and private payments.
Most of the hospitals are operated as non-profit organisations and are scrutinised by several
organisations like donors, Health Administration etc. Under these circumstances debt financing
adds additional burden on these organisations in the form or additional scrutiny, pledging of
assets to secure loans which needs several clearances, payment obligations from sources which
are limited. The organisations also need to keep a strict control over its costs in order to maintain
the cash flows to meet the debt obligations. Hence there is a possibility of reduction in charitable
treatments or treatments offered at a reduced cost to the patients. Also those which are non-tax
paying entities find the attraction of tax exemption of interest payments is not available to them.
However the debt financing do have some benefits for health care providers. For example,
equipment leasing is an option taken by many health care providers to buy hospital equipment.
This is done to
Based on the general structure of the healthcare providers are not for profit organisations, adding
debt do affect flexibility of the operations of the entity.
