American Hospital Corporation

Topics: Bond, Financial ratios, Debt Pages: 9 (3331 words) Published: October 25, 2010
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 acquisitions. Discussion

Hospital Corporation of America’s performance
This section uses DuPont Analysis (Appendix 4) to breakdown and to explain the key issues impacting on HCA’s return on equity. Profitability
HCA’s net profit margin has noticeably declined in stark contrast with that of its competitors. This is because HCA has focused on an acquisitory strategy especially by taking over not-for-profit hospitals in the short term to increase its market share in the long term instead of maximizing profits in the short term and losing out in the long run. Other competitors have focused on maximizing their bottom-lines and have not focused on acquiring not-for profit hospitals. HCA on the other hand has softened its image with lower profit margins to convince the altruistic owners of not-for-profit hospitals to sell to HCA.

Asset Efficiency
HCA’s asset turnover has declined due to its current product-market strategy as of 1981; its assets have increased at a rate faster than its revenue. HCA has acquired several old, out-dated assets which have not been able to generate revenue efficiently. Also unsophisticated and inefficient management systems resulting in the number of doubtful accounts ballooning due to the not-for profit acquisitions are to blame. The company should consider renovating the buildings and revamping the equipment and management system to resolve working capital management issues. Financial Leverage

Financial leverage has increased substantially over the past two years due to HCA borrowing for its acquisition funding needs. In accordance with its product-market strategy, HCA has taken on debt and equity in accordance with the size of its acquisitions by also taking into account any shortfall in retained earnings. Nevertheless the company has issued large amounts of commercial paper and mortgage and revenue bonds at a rate faster than that of its equity issues resulting in financial leverage increasing so fast. Hospital Corporation of America’s business strategy

HCA adopted different business strategies throughout the early 1970s up to 1982. The business strategy that was adopted by HCA depended on the industry growth opportunities and market share that it had in the proprietary hospital industry. The Boston Consulting Group Matrix will be used to explain HCA’s business strategy throughout this period and in the future (Appendix 1). In the early 1970s, HCA was a question mark (high market growth rate, low relative market share). In order to increase its market share in the industry, it acquired a substantial number of existing hospitals and constructed several new hospital units. During this period, the hospital industry in general, grew a lot due to programs like Medicare and Medicaid which stimulated demand for hospital services and eliminated tremendous bad-debt burdens thereby stabilizing the company’s revenue inflow. From 1978 to 1981, HCA was a star (high market growth rate, high relative market share). It continued to acquire other proprietary hospital management companies and non-profit hospitals. HCA’s market share by the end of 1981 had increased from 31.66% in 1980, to 36.49% (Appendix 2). From 1982 to 1987, HCA will be in transition from a star to a cash...
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