Managing Director, USCAN Business Leader at GE Healthcare Financial Services

Dissertation Title

The Relationship of Debt Ratio and Financial Performance for Large Not-for-Profit Health Systems

Dissertation Abstract

This dissertation was a quasi-experimental research study exploring the relationship between long-term to debt capitalization ratio and financial performance in an environment where interest rates remained historically low and stable, while investment returns in the U.S. equity markets increased year over year. The study reviewed 142 not for profit health systems and examined total and non-operating margins along with long-term debt to capitalization ratio to determine if margins increased as long-term debt increased. Researchers have discussed the opportunity that not for profit health systems have to utilize low cost, tax-exempt debt to maintain or grow their endowments and in turn their non-operating income. The environment during the study years of 2015, 2016, and 2017 presented a great opportunity to investigate the relationship.

The study used secondary data of 142 not for profit health systems, rated by Standard and Poor’s, and utilized their audited financial statements to calculate the variables. The data were used to test the hypothesis that incurring additional debt would lead to a higher level of total margin and/or non-operating margin in an environment where equity returns were increasing as borrowing rates on debt were decreasing.

Findings of the study indicated that there was a relationship between both total and non-operating margin and long-term debt to capitalization, but that the relationship was negatively correlated. The correlation became both stronger and the differences in margin performance were greater as equity market returns, as measured by the Standard and Poor’s 500 Index, increased suggesting that not for profit hospital systems with lower debt to capitalization had higher exposure to equities as compared to those with higher debt to capitalization ratios. The study controlled for a health system’s days of cash on hand and return on assets, both of which showed a significant relationship with both total and non-operating margins. The study provides findings that will assist hospital administrators as well as lending institutions and finance companies that work with health systems, to target the ideal deal capital structure for an organization.