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Evaluating the underlying factors behind variable rate debt

Michael J McCue1, Tae Hyun Tanny Kim

  • 1Department of Health Administration, Virginia Commonwealth University, Richmond, VA, USA. mccue@vcu.edu

Health Care Management Review
|December 14, 2007
PubMed

Insights

Hospitals with strong finances increasingly use variable rate debt to reduce capital costs. Factors like bond insurance and higher profitability influence this trend, indicating a strategic financial management approach.

Area of Science:

  • Healthcare Finance
  • Capital Markets
  • Financial Management

Background:

  • Variable rate debt usage in healthcare bonds has significantly increased since 1995.
  • In 2004, variable rate debt constituted 63.4% of healthcare bonds issued, up from 30.6% in 1995.

Purpose of the Study:

  • To identify factors influencing hospitals' choice of variable rate debt over fixed rate debt.
  • Investigate issuer characteristics, issue details, and credit spread implications.

Main Methods:

  • Analyzed 230 tax-exempt bond issues from acute care hospitals and health systems (2000-2004).
  • Employed a logistic regression model to differentiate between variable and fixed rate debt issuance.

Main Results:

  • Bond insurance positively correlated with variable rate debt; callable features showed a negative association.
  • Hospitals in certificate-of-need states with higher case mix acuity, profit margins, debt service coverage, and lower debt levels favored variable rate debt.

Conclusions:

  • Financially strong hospitals utilize variable rate debt to lower capital costs.
  • Improved education by investment bankers on interest rate savings may also contribute to this trend.
Abstract

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