Capital finance and ownership conversions in health care

Health Affairs

Volumn 19, Issue 1, 2000, Pages 56-71

  Robinson, James C ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

FINANCIAL MANAGEMENT; HEALTH CARE COST; HEALTH CARE FACILITY; HOSPITAL; HOSPITAL ORGANIZATION; HUMAN; INTERNET; INVESTMENT; MANAGEMENT; NON PROFIT HOSPITAL; ORGANIZATION; ORGANIZATION AND MANAGEMENT; REIMBURSEMENT; REVIEW; TAX; UNITED STATES;

CAPITAL FINANCING; DECISION MAKING, ORGANIZATIONAL; FINANCIAL MANAGEMENT, HOSPITAL; HEALTH CARE SECTOR; HEALTH FACILITY MERGER; HOSPITAL RESTRUCTURING; HOSPITALS, PROPRIETARY; HOSPITALS, VOLUNTARY; HUMANS; INSURANCE, HEALTH, REIMBURSEMENT; INTERNET; INVESTMENTS; OWNERSHIP; PRACTICE MANAGEMENT, MEDICAL; TAXES; UNITED STATES;

EID: 0005031915     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.19.1.56     Document Type: Article

References (61)

1. See B.H. Gray, "Conversion of HMOs and Hospitals: What's At Stake?" Health Affairs (Mar/Apr 1997): 29-47.
2. If declining industries do not consolidate and reduce excess capacity and have not established brand names, patents, or other barriers to market entry, they can face vigorous price competition that eliminates free cash flow and internal capital generation. Conglomerate diversification into new sectors by firms based in declining manufacturing and energy industries during the 1960s and 1970s is consistent with theories of oligopoly power and free cash flows, while their subsequent refocusing is evidence of an intensification of competition and erosion of free cash flows due to deregulation and globalization.
3. These continued ties are particularly strong in nations such as Japan, Korea, and Germany with large diversified conglomerates and "relationship banking" ties among the financial, industrial, and commercial sectors. M. Aoki, "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature 28 (1990): 1-27; D.E. Weinstein and Y. Yafeh, "On the Costs of a Bank-Centered Financial System: Evidence from the Main Bank Relations in Japan," Journal of Finance 53, no. 2 (1998): 635-672; M.L. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (Berkeley, Calif.: University of California Press, 1992); A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990); and M.J. Roe, "Some Differences in Corporate Structure in Germany, Japan, and the United States," Yale Law Journal 102 (1993): 1927-2003.
4. These continued ties are particularly strong in nations such as Japan, Korea, and Germany with large diversified conglomerates and "relationship banking" ties among the financial, industrial, and commercial sectors. M. Aoki, "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature 28 (1990): 1-27; D.E. Weinstein and Y. Yafeh, "On the Costs of a Bank-Centered Financial System: Evidence from the Main Bank Relations in Japan," Journal of Finance 53, no. 2 (1998): 635-672; M.L. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (Berkeley, Calif.: University of California Press, 1992); A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990); and M.J. Roe, "Some Differences in Corporate Structure in Germany, Japan, and the United States," Yale Law Journal 102 (1993): 1927-2003.
5. These continued ties are particularly strong in nations such as Japan, Korea, and Germany with large diversified conglomerates and "relationship banking" ties among the financial, industrial, and commercial sectors. M. Aoki, "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature 28 (1990): 1-27; D.E. Weinstein and Y. Yafeh, "On the Costs of a Bank-Centered Financial System: Evidence from the Main Bank Relations in Japan," Journal of Finance 53, no. 2 (1998): 635-672; M.L. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (Berkeley, Calif.: University of California Press, 1992); A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990); and M.J. Roe, "Some Differences in Corporate Structure in Germany, Japan, and the United States," Yale Law Journal 102 (1993): 1927-2003.
6. These continued ties are particularly strong in nations such as Japan, Korea, and Germany with large diversified conglomerates and "relationship banking" ties among the financial, industrial, and commercial sectors. M. Aoki, "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature 28 (1990): 1-27; D.E. Weinstein and Y. Yafeh, "On the Costs of a Bank-Centered Financial System: Evidence from the Main Bank Relations in Japan," Journal of Finance 53, no. 2 (1998): 635-672; M.L. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (Berkeley, Calif.: University of California Press, 1992); A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990); and M.J. Roe, "Some Differences in Corporate Structure in Germany, Japan, and the United States," Yale Law Journal 102 (1993): 1927-2003.
7. These continued ties are particularly strong in nations such as Japan, Korea, and Germany with large diversified conglomerates and "relationship banking" ties among the financial, industrial, and commercial sectors. M. Aoki, "Toward an Economic Model of the Japanese Firm," Journal of Economic Literature 28 (1990): 1-27; D.E. Weinstein and Y. Yafeh, "On the Costs of a Bank-Centered Financial System: Evidence from the Main Bank Relations in Japan," Journal of Finance 53, no. 2 (1998): 635-672; M.L. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (Berkeley, Calif.: University of California Press, 1992); A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990); and M.J. Roe, "Some Differences in Corporate Structure in Germany, Japan, and the United States," Yale Law Journal 102 (1993): 1927-2003.
8. D.R. Cohodes and B.M. Kinkead, Hospital Capital Formation in the 1980s (Baltimore: Johns Hopkins University Press, 1984).
9. See A. Schleifer and R.W. Vishny, "A Survey of Corporate Governance," Journal of Finance 52, no. 2 (1997): 737-783.
10. See B. Zider, "How Venture Capital Works," Harvard Business Review (November-December 1998): 131-139.
11. O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568; J.C. Stein, "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance 52, no. 1 (1997): 111-133; W. Lamont, "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance 52, no. 1 (1997): 83-109; and H. Shin and R.M. Stulz, "Are Internal Capital Markets Efficient?" Quarterly Journal of Economics 113, no. 2 (1998): 531-552.
12. O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568; J.C. Stein, "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance 52, no. 1 (1997): 111-133; W. Lamont, "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance 52, no. 1 (1997): 83-109; and H. Shin and R.M. Stulz, "Are Internal Capital Markets Efficient?" Quarterly Journal of Economics 113, no. 2 (1998): 531-552.
13. O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568; J.C. Stein, "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance 52, no. 1 (1997): 111-133; W. Lamont, "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance 52, no. 1 (1997): 83-109; and H. Shin and R.M. Stulz, "Are Internal Capital Markets Efficient?" Quarterly Journal of Economics 113, no. 2 (1998): 531-552.
14. O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568; J.C. Stein, "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance 52, no. 1 (1997): 111-133; W. Lamont, "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance 52, no. 1 (1997): 83-109; and H. Shin and R.M. Stulz, "Are Internal Capital Markets Efficient?" Quarterly Journal of Economics 113, no. 2 (1998): 531-552.
15. See G.B. Shields and G.C. McKann, "Raising Health Care Capital through the Public Equity Markets," Topics in Health Care Finance 19, no. 1 (1991): 21-36.
16. The degree of effective control wielded by shareholders depends on the underlying statutory framework. R. La Porta et al., "Law and Finance," Journal of Political Economy 106, no. 6 (1998): 1113-1155; R. La Porta et al., "Legal Determinants of External Finance," Journal of Finance 52, no. 3 (1997): 1131-1150; and M. Roe, Strong Managers, Weal: Owners: The Political Roots of American Corporate Finance (Princeton, N.J.: Princeton University Press, 1994).
17. The degree of effective control wielded by shareholders depends on the underlying statutory framework. R. La Porta et al., "Law and Finance," Journal of Political Economy 106, no. 6 (1998): 1113-1155; R. La Porta et al., "Legal Determinants of External Finance," Journal of Finance 52, no. 3 (1997): 1131-1150; and M. Roe, Strong Managers, Weal: Owners: The Political Roots of American Corporate Finance (Princeton, N.J.: Princeton University Press, 1994).
18. The degree of effective control wielded by shareholders depends on the underlying statutory framework. R. La Porta et al., "Law and Finance," Journal of Political Economy 106, no. 6 (1998): 1113-1155; R. La Porta et al., "Legal Determinants of External Finance," Journal of Finance 52, no. 3 (1997): 1131-1150; and M. Roe, Strong Managers, Weal: Owners: The Political Roots of American Corporate Finance (Princeton, N.J.: Princeton University Press, 1994).
19. Some practice management entities, such as MedCath and TeamHealth, have been taken private with support of large institutional investors. MedPartners and FPA have sold their medical groups to investors (including physicians) funded by bank loans and bonded debt. Pieces of MedPartners and PhyCor have been purchased by nonprofit hospitals using tax-exempt bonds.
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21. P. Bolton and E. Von Thadden, "Blocks, Liquidity, and Corporate Control," Journal of Finance 53, no. 1 (1998): 1-25; J.E. Bethel, J.P. Liebenskind, and T. Opler, "Block Share Purchases and Corporate Performance," Journal of Finance 53, no. 2 (1998): 605-634; E. Maug, "Large Shareholders as Monitors: Is There a Tradeoff between Liquidity and Control?" Journal of Finance 53, no. 1 (1998): 65-98; and F.H. Easterbrook and D.R. Rischel, "Voting in Corporate Law," Journal of Law and Economics 26 (1983): 395-427.
22. P. Bolton and E. Von Thadden, "Blocks, Liquidity, and Corporate Control," Journal of Finance 53, no. 1 (1998): 1-25; J.E. Bethel, J.P. Liebenskind, and T. Opler, "Block Share Purchases and Corporate Performance," Journal of Finance 53, no. 2 (1998): 605-634; E. Maug, "Large Shareholders as Monitors: Is There a Tradeoff between Liquidity and Control?" Journal of Finance 53, no. 1 (1998): 65-98; and F.H. Easterbrook and D.R. Rischel, "Voting in Corporate Law," Journal of Law and Economics 26 (1983): 395-427.
23. P. Bolton and E. Von Thadden, "Blocks, Liquidity, and Corporate Control," Journal of Finance 53, no. 1 (1998): 1-25; J.E. Bethel, J.P. Liebenskind, and T. Opler, "Block Share Purchases and Corporate Performance," Journal of Finance 53, no. 2 (1998): 605-634; E. Maug, "Large Shareholders as Monitors: Is There a Tradeoff between Liquidity and Control?" Journal of Finance 53, no. 1 (1998): 65-98; and F.H. Easterbrook and D.R. Rischel, "Voting in Corporate Law," Journal of Law and Economics 26 (1983): 395-427.
24. M.C. Jensen, "Agency Costs of Free Cash Flows, Corporate Finance, and Takeovers," American Economic Review 76 (1986): 323-329.
25. D.J. Teece et al., "Understanding Corporate Coherence: Theory and Evidence," Journal of Economic Behavior and Organization 23 (1994): 1-30; and C.A. Montgomery, "Corporate Diversification," Journal of Economic Perspectives 8, no. 3 (1994): 163-178.
26. D.J. Teece et al., "Understanding Corporate Coherence: Theory and Evidence," Journal of Economic Behavior and Organization 23 (1994): 1-30; and C.A. Montgomery, "Corporate Diversification," Journal of Economic Perspectives 8, no. 3 (1994): 163-178.
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28. W. Baumol, Business Behavior, Value, and Growth (New York: MacMillan, 1959); O.E. Williamson, The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm (Englewood Cliffs, N.J.: Prentice Hall, 1964); and R. Marris, The Economic Theory of Managerial Capitalism (Glencoe, Ill.: Free Press, 1964).
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30. D. Lee, "Rating Methodology: For-Profit Hospitals versus Not-for-Profit Hospitals - Explaining the Gap" (New York: Moody's Investors Service, May 1999).
31. Theodore Marmor and colleagues implicitly make this point. T.R. Marmor, M. Schlesinger, and R.W. Smithey, 'Nonprofit Organization in Health Care: The Nonprofit Sector, ed. W.W. Powell (New Haven, Conn.: Yale University Press, 1987).
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34. Cain Brothers, Home Health Care Hits a Brick Wall Strategies in Capital Finance, vol. 25 (New York: Cain Brothers, Fall 1998); and G. Harris and J.L. Lorenz, Homecare Industry Update (New York: Warburg Dillon Read, 10 June 1999).
35. AT. Feinstein, L.C. Marsh, and J.R. Raskin, Health Care Supply Management Distribution Outsourcing Guidebook (New York: Lehman Brothers, 26 May 1999); and S.J. Valiquette, The Pharmaceutical Benefit Management Sector (New York: Warburg Dillon Read, 8 July 1999).
36. AT. Feinstein, L.C. Marsh, and J.R. Raskin, Health Care Supply Management Distribution Outsourcing Guidebook (New York: Lehman Brothers, 26 May 1999); and S.J. Valiquette, The Pharmaceutical Benefit Management Sector (New York: Warburg Dillon Read, 8 July 1999).
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40. J.C. Robinson, "The Future of Managed Care Organization," Health Affairs (Mar/Apr 1999): 7-24; G.E. Harris and M.J. Ripperger, Managed Care Industry (New York: Warburg Dillon Read, 22 June 1999); and C. Boorady and N. Pyle, Managed Care Overview: Technology and Consumerism Increase Scale Advantage (New York: Goldman Sachs Investment Research, 10 June 1999).
41. D. Sherlock, Blues: Market, Financial, and Operating Statistics for Blue Cross and Blue Shield Affiliates (Gwynedd, Pa.: Sherlock Company, July 1999).
42. B.H. Gray, For-Profit Enterprise in Health Care (Washington: National Academy Press, 1986); and F.A. Sloan, "Property Rights in the Hospital Industry," in Health Care in America; The Political Economy of Hospitals and Health Insurance, ed. H.E. Frech and R. Zeckhauser (San Francisco: Pacific Research Institute for Public Policy, 1988), 103-141.
43. B.H. Gray, For-Profit Enterprise in Health Care (Washington: National Academy Press, 1986); and F.A. Sloan, "Property Rights in the Hospital Industry," in Health Care in America; The Political Economy of Hospitals and Health Insurance, ed. H.E. Frech and R. Zeckhauser (San Francisco: Pacific Research Institute for Public Policy, 1988), 103-141.
44. See, for example, M.J. Coye, "The Sale of Good Samaritan: A View from the Trenches," Health Affairs (Mar/Apr 1997): 102-107; and S. Massey, "Anatomy of a Bankruptcy: The Rise and Fall of Allegheny General Hospital," Pittsburgh Post Gazette (Reprint), 17-23 January 1999.
45. See, for example, M.J. Coye, "The Sale of Good Samaritan: A View from the Trenches," Health Affairs (Mar/Apr 1997): 102-107; and S. Massey, "Anatomy of a Bankruptcy: The Rise and Fall of Allegheny General Hospital," Pittsburgh Post Gazette (Reprint), 17-23 January 1999.
46. M.C. Jensen and R.S. Ruback, "The Market for Corporate Control: The Scientific Evidence," Journal of Financial Economics 11 (1983): 5-50; M.C. Jensen, "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance 2, no. 1 (1989): 35-44; M.D.J. Denis, D.E. Denis, and A. Sarin, "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance 52, no. 1 (1997): 135-160; and S.N. Kaplan and M.S. Weisbach, "The Success of Acquisitions: Evidence from Divestures," Journal of Finance 47, no. 1 (1992): 107-138.
47. M.C. Jensen and R.S. Ruback, "The Market for Corporate Control: The Scientific Evidence," Journal of Financial Economics 11 (1983): 5-50; M.C. Jensen, "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance 2, no. 1 (1989): 35-44; M.D.J. Denis, D.E. Denis, and A. Sarin, "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance 52, no. 1 (1997): 135-160; and S.N. Kaplan and M.S. Weisbach, "The Success of Acquisitions: Evidence from Divestures," Journal of Finance 47, no. 1 (1992): 107-138.
48. M.C. Jensen and R.S. Ruback, "The Market for Corporate Control: The Scientific Evidence," Journal of Financial Economics 11 (1983): 5-50; M.C. Jensen, "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance 2, no. 1 (1989): 35-44; M.D.J. Denis, D.E. Denis, and A. Sarin, "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance 52, no. 1 (1997): 135-160; and S.N. Kaplan and M.S. Weisbach, "The Success of Acquisitions: Evidence from Divestures," Journal of Finance 47, no. 1 (1992): 107-138.
49. M.C. Jensen and R.S. Ruback, "The Market for Corporate Control: The Scientific Evidence," Journal of Financial Economics 11 (1983): 5-50; M.C. Jensen, "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance 2, no. 1 (1989): 35-44; M.D.J. Denis, D.E. Denis, and A. Sarin, "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance 52, no. 1 (1997): 135-160; and S.N. Kaplan and M.S. Weisbach, "The Success of Acquisitions: Evidence from Divestures," Journal of Finance 47, no. 1 (1992): 107-138.
50. S.N. Kaplan, "The Staying Power of Leveraged Buyouts," Journal of Financial Economics 29 (1991): 287-313.
51. D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (Mar/Apr 1997): 48-68; and N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (Mar/Apr 1997): 229-237. The March/April 1997 issue of Health Affairs includes case studies of conversion policy making in a variety of states.
52. D. Shriber, "State Experience in Regulating a Changing Health Care System," Health Affairs (Mar/Apr 1997): 48-68; and N.M. Kane, "Some Guidelines for Managing Charitable Assets from Conversions," Health Affairs (Mar/Apr 1997): 229-237. The March/April 1997 issue of Health Affairs includes case studies of conversion policy making in a variety of states.
53. D.M. Fox and P. Isenberg, "Anticipating the Magic Moment: The Public Interest in Health Plan Conversions in California," Health Affairs (Spring 1996): 202-209; E. Hamburger, J. Finberg, and L. Alcantar, "The Pot of Gold: Monitoring Health Care Conversions Can Yield Billions of Dollars for Health Care," Clearinghouse Review 29, no. 5 (1995): 473-504; and "Conversion Foundations: A Listing," Health Affairs (Mar/Apr 1997): 238-242.
54. D.M. Fox and P. Isenberg, "Anticipating the Magic Moment: The Public Interest in Health Plan Conversions in California," Health Affairs (Spring 1996): 202-209; E. Hamburger, J. Finberg, and L. Alcantar, "The Pot of Gold: Monitoring Health Care Conversions Can Yield Billions of Dollars for Health Care," Clearinghouse Review 29, no. 5 (1995): 473-504; and "Conversion Foundations: A Listing," Health Affairs (Mar/Apr 1997): 238-242.
55. D.M. Fox and P. Isenberg, "Anticipating the Magic Moment: The Public Interest in Health Plan Conversions in California," Health Affairs (Spring 1996): 202-209; E. Hamburger, J. Finberg, and L. Alcantar, "The Pot of Gold: Monitoring Health Care Conversions Can Yield Billions of Dollars for Health Care," Clearinghouse Review 29, no. 5 (1995): 473-504; and "Conversion Foundations: A Listing," Health Affairs (Mar/Apr 1997): 238-242.
56. P.M. Nudelman and L.M. Andrews, "The Value Added of Not-for-Profit Health Plans," New England Journal of Medicine 334 (1996): 1057-1059; and D. Lawrence, "Why We Want to Remain a Nonprofit Health Care Organization," Health Affairs (Mar/Apr 1997): 118-120.
57. P.M. Nudelman and L.M. Andrews, "The Value Added of Not-for-Profit Health Plans," New England Journal of Medicine 334 (1996): 1057-1059; and D. Lawrence, "Why We Want to Remain a Nonprofit Health Care Organization," Health Affairs (Mar/Apr 1997): 118-120.
58. D. Sherlock, "New Strategy for Assuring Fair Market Value in Health Plan Conversions," Pulse: Analysis (Gwynedd, Pa.: Sherlock Company, May 1999).
59. R.G. Frank and D.S. Salkever, "Nonprofit Organization in the Health Sector," Journal of Economic Perspectives 8, no. 4 (1994): 129-144.
60. H. Hansmann, The Ownership of Enterprise (Cambridge, Mass.: Harvard University Press, 1996); and J. Needleman, D.J. Chollet, and J. Lamphere, "Hospital Conversion Trends," Health Affairs (Mar/Apr 1997): 187-195.
61. H. Hansmann, The Ownership of Enterprise (Cambridge, Mass.: Harvard University Press, 1996); and J. Needleman, D.J. Chollet, and J. Lamphere, "Hospital Conversion Trends," Health Affairs (Mar/Apr 1997): 187-195.