Hospital Corporation Of America

HCA objectives/goals

The principal objective of this company is to attain at least 13% annual growth in the earnings per share after removing the effects of inflation hence the annual growth sought would be 25% to 30% range including the effects of inflation for the near foreseeable future. This aggressive rate was triggered by the competition from the other hospital management companies through the acquisition of hospitals. This ambitious growth rate would affect the company’s shareholder equity and the shares would increase by 35% to $3.00. The company management therefore is doing a lot of construction of new hospitals, acquisitions, signing of new management contracts and expansion of services. It’s also planning to expand to new areas and into other health services like the outpatient surgeries and the home health care services. The major sources of growth in the 1980s was believed to have been the acquisition of other businesses i.e. hospital management companies hence this company is venturing in growth by purchasing the non-profit county, religious or municipal hospitals with old buildings, unsophisticated management and obsolete equipment that need renovation.

The management also has the goal of establishing and maintaining quality image as a financial strength for the company.  HCA has been considered one of the most attractive due to its industry decentralized management system, leadership position, high quality of its corporate management chaired by most prominent business leaders hence this is important in approaching the non-profit making hospitals which are directed by the public agents and politicians to seek acquisition since there has been a lot of misgivings that some of the owners of profit-making hospitals management did not care about the client welfare hence good image would help HCA to overcome doubts of the trustees and be able to convince them to sell.

HCA is also targeting a debt to total equity ratio of 60% which is in line with the degree of leverage expected by the rating agencies for an A-rated hospital management company like HCA. The debt has been used to finance the real estate development projects on a 75% loan to value basis. Since 15% of the company’s expenditure on hospital projects was of the equipment rather than the plant and property, it would be conservative to use only 60% debt financing of its hospital constructions. This has long become the standard for the proprietary hospital management industry.

Another objective of HCA is to have a minimum return on total capital of 17% after all taxes and also expected this to be quite difficult to achieve/maintain during periods of rapid growth through constructions and acquisitions. A dividend pay out of 15% of the companies net income and the improvement/maintenance of the net profit margins of 9% of the operating reserves and also keeping an average interest cost rate of 15% are also other objectives of the HCA.

Attainability and financing of the goals

The natural and the aging of the USA population could be relied on by the company to increase the revenues due to the higher occupancy rates that are expected to translate into higher earnings and the company’s provision of other services and the concentration of further cost containment would add to the growth in the company’s earnings capacity. The nation’s health care insurance systems reformation (by making consumers more price sensitive and hospitals to be costs conscious) would be useful in costs reduction since the third parties in USA pay for health insurance costs through taxation to the covered Americans. The hospitals also receive re-imbursements from the state-backed health programs like the Medicaid and the Medicare hence normally allow hospitals to record a return on equity of 150% and this provides a stable revenue streams insulated from economic cycles and inflation (Bruce, 2001).

Funds needed by HCA, financial strategy and the bond rating

The capital expenditure in the 1992 was $575 million and is expected to increase by 20% in the years to come hence increased capital is required. The company attempted to increase its capital requirements by addressing its debt repayment strategies/schedule by returning to its targeted capital structure of 60%-40% debt ratio in order to retain the A-bond rating. The company should employ such conservative policies since by maintaining high degree of leverage would cost HCA its A-bond rating and would loss hence damaging the company since the company is well competitive in the bond market as compared to those of competitors. HCA bonds were previously rated as BBB and later upgraded to A. It would also be risky to increase cash flows in the health management company in the changing regulatory environment thus the most preferred rate is 50% or less.

The sources of finances for HCA for the construction and the acquisition programs majorly is from the external financing like the revolving bank credits, industrial revenue bonds and the long-term mortgage loans have been used to fund hospital completions and acquisitions. The HCA management has also matured and its strong performance has attracted other forms of financing including the public bonds and mortgage bonds. The company should also sell commercial papers like the 1980 $89 million debts which HCA added to its balance sheet which bore a fluctuating interest rate and matured in seven years. This made HCA highest leveraged company in United States of America with an A bond rating. The company also issued new equities and stocks in the years from 1969 to 1971.

Reference

Bruce Wasserstein.(2001). Business and Economics: Humana and Hospital Corporation of America were early pioneers. pp.504.