American Hospital Corporation

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Introduction Hospital Corporation of America (HCA) is a proprietary hospital management company. The company has been following an acquisitive strategy by taking over hospital companies and not-for-profit hospitals. The firm is also considering expanding into new health service areas like home health care and outpatient surgery. The company is at a crossroads with regard to its financial goals; HCA currently faces the likelihood of adverse changes to the Medicare/Medicaid policy which could strain the company’s profitability along with a substantial increase in financial leverage risks coupled with an increase in required expenditure to reap the effect of prospective operating synergies like economies of scale and scope from the…show more content…
This is because there is a lack of growth opportunities through acquisition and construction of new hospitals. HCA is expected to mature and become a cash cow by about 1987. At this stage, it is expected to incur limited capital expenditure. Instead, the company can be "milked" continuously from its existing operations and is expected to generate cash in excess of the amount required to maintain the business. Likely impact of proposed changes to “prospective reimbursement” One of the significant impacts of proposed changes to “prospective reimbursement” is that hospitals will be paid based on expected fixed rates rather than actually incurred costs. Hospitals will no longer be paid using cost-plus basis (costs plus a certain percentage of profits based on costs). As a result of fixed rate payments to hospitals, there will be more incentive for hospitals to reduce costs and improve efficiency in order to maximise profits. The prospective reimbursement program will also result in hospitals not being able to recoup full amount of allowable interest expense. Instead, they can only recoup the interest tax shield portion of the interest expense. Investors
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