The expansion of cities and the creation of new jobs is a successful urbanistic development strategy, but such decisions require careful preparation in terms of the health function of the municipality. In particular, situations in which a city’s population grows significantly in a short period, while the number of beds in local hospitals remains unchanged, must be avoided not to stimulate the development of epidemics and regional quarantines. Consequently, hospital capacity must then be expanded, which raises questions about funding, sources of funding, and long-term goals. This essay attempts to answer these questions through a case study of the administrative team’s decision to expand the local hospital by an additional 150 beds while the city’s population grows.
It is clear that one of the administrative team’s first questions is to determine the type of funding that should be resorted to for the purposes of the hospital organization. The primary difference between the two types of financing, debt and equity financing, is determined by the way the company takes money from. In debt financing, for example, the hospital obtains funds by borrowing money that will need to be paid back over time. In contrast, equity financing is provided by selling a portion of the company’s equity to private investors, who, in turn, receive a stake in the company (Maverick, 2021). It is clear that in this case, the company loses part of its business by selling it to an outside entrepreneur, which creates a burden in terms of making critical decisions. Thus, it is important to understand the advantages and disadvantages of both types of financing in order not to make a critical mistake.
Based on the above, debt financing is more relevant for a municipal hospital because budget capital is extremely sensitive to third-party financing. The hospital is an important strategic facility for the city, which means losing even partial control over key decisions if part of the management is transferred to an outside investor would be the wrong decision. In addition, a 150-bed expansion and additional expansion of acute care and intensive care would ultimately require a specific amount that would be easier to borrow than to calculate in terms of selling equity. Of course, the hospital would then have to make regular debt payments with interest on the terms of the loan, but this is not expected to be a particularly severe problem in the face of such a dramatic expansion of the city and the resulting increase in the client base. Once the type of financing has been chosen, it is necessary to determine the sources of funds that will provide the financing.
Banks are the traditional providers of interest-bearing money, but it is essential to understand that they are not the only ones who can provide debt financing for a hospital. For example, bank loans do provide full use of the money during the reporting period. At that time, the hospital is indebted to the bank to pay a minimum repayment amount with interest, so the bank ends up with the upper hand for providing the hospital with the money to expand. Private investors or sponsors who lend personal money to the hospital at interest can also use such a scheme. In addition, if the hospital is the only city hospital in the municipality, the state must provide grant funding upon request. However, if the hospital in question is of the for-profit type, an SBA loan from the U.S. government, which acts as an intermediary between lending partners and the hospital, covering risk and facilitating access to capital (SBA, 2021), can be obtained. It is this diversity of sources that should be used by the hospital’s administrative team to minimize risk.
There are four fundamental principles of investment management practice that also help reduce possible risks. These concern not only how exactly to get money — in small portions from a number of sources — but also how to spend that money wisely afterward. The first goal is to allocate assets so that the hospital will not incur severe losses (IAG, n.d.) if one area is lost. For example, this can be accomplished through the use of multiple suppliers of clinical equipment instead of a single distributor. The second goal of investment management is to structure the economic context of the company so that in the event of any errors or mistakes, it is possible to address the source of that error. Structuring allows for consistency and adherence to the original plan, which is critical in financial management. The other goals of investment management, however, cannot be ignored, which are aimed at the long term.
The third goal is long-term planning, which allows for the proper management of borrowed funds. Creating a long-term plan helps the company identify all of the critical spending points of the investment and the benefits the hospital receives over the long term. For example, an investment of tens of thousands of dollars in medical equipment now can bring the hospital triple the profit in two years through proper long-term planning. From this comes the fourth goal of investment management, which corresponds to capital growth. Through borrowed investment, the company increases equity, and after the loan is repaid, the company’s capital will be increased. However, the economic agenda is not stable, and therefore the hospital will always need cash reserves.
In general, cash reserves should be defined as those cash reserves that can be used in crisis situations when a hospital urgently needs money. This generally refers to any unplanned expenses for which finances are urgently needed for a period of several months. This can apply to any cash reserves related to natural disasters or epidemics that require urgent spending, as in the case of COVID-19. It also applies to repairs to equipment that has failed and needs to be replaced immediately. Cash reserves may also be needed for financial assistance to employees who have lost loved ones or compensation for anniversaries and holidays. Finally, it is not uncommon for a hospital to experience an economic crisis, and assets cannot be used to cover debt obligations, or any other costs associated with making the hospital functional. It is clear, however, that the administrative team cannot be fully assured of continued economic growth, which means that even after expansion, debt obligations may be required.
Long-term credit commitments help a company have cash reserves and financial protection, as long as it has a well-thought-out financing strategy. In particular, if the amount of the monthly interest payment is not a severe burden on the hospital, this type of long-term financial relationship with creditors benefits the hospital. Private investors, sponsors, or governments continue to be such sources, but the situation is more difficult for banks, which are not inclined to lend for long periods at low-interest rates (Tuovila, 2020). Nevertheless, with proper investment management, the hospital receives a regular inflow of cash that can be spent and then returned to the issuer for further expansion.
References
Maverick, J. B. (2021). Equity financing vs. debt financing: What’s the difference?Investopedia. Web.
IAG. (n.d.). Investmark’s four key principles of investment management. Investmark Advisory Group. Web.
SBA. (2021, March 12). Loans. U.S. Small Business Administration. Web.
Tuovila, A. (2020). Long-term debt. Investopedia. Web.