HCA Case

Topics: Revenue, Balance sheet, Hospital Pages: 15 (6445 words) Published: March 25, 2015
For the exclusive use of M. Rom, 2014.
Harvard Business School

Rev. February 10, 1988

Hospital Corporation of America (A)
In January of 1982 Hospital Corporation of America (HCA) faced a complex financial situation. Following a major acquisition in 1981, HCA’s ratio of debt to total capital approached 70%—well in excess of its target ratio of 60%. Interest coverage had dropped to 2.4 times, below its target of 3.0 times, and the lowest level experienced since HCA founding in 1968. Although some investors justified and even welcomed HCA’s more aggressive use of leverage, others were concerned that HCA’s capital structure could cost the company its single-A bond rating. Mounting interest expense on the debt could also cause HCA’s first quarter earnings per share (EPS) to decline relative to those of a year ago. If it did, this would be the first such quarter-to-quarter decline in EPS in HCA’s 13-year history. In light of these developments, HCA’s management had to decide what, if anything, should be done about its capital structure and what specific steps should be taken soon to achieve the desired mix of debt and equity.

HCA’s Early Development
HCA is a proprietary, hospital management company founded in Nashville, Tennessee, by two physicians, Thomas F. Frist, Sr., and Thomas F. Frist, Jr., and a former pharmacist, Jack C. Massey, who was also the former owner of Kentucky Fried Chicken. Beginning with only one, 150bed hospital in 1968, HCA grew to become the nation’s largest hospital management company. By 1981 HCA owned or managed 349 hospitals in the United States and overseas and had net operating revenues of $2.1 billion. Since its founding, HCA had 32.2% annual revenue growth and 32.6% annual earnings growth. Pretax profit margins, averaging 9%, were the highest and most consistent among the major proprietary hospital chains. Recent financial statements and a 10-year summary of HCA’s operations appear in Exhibits 1–4.

The Proprietary Hospital Industry
Proprietary hospital management companies, i.e., corporations that own and manage chains of hospitals on a for-profit basis, were a relatively new phenomenon in the $118 billion U.S. hospital care business. The enactment of entitlement programs such as Medicare and Medicaid in 1965 stimulated demand for hospital services in the United States and virtually eliminated the tremendous bad-debt burden (i.e., weak accounts receivable) that had traditionally plagued the hospital industry. This created a valuable opportunity for private investors to build or acquire hospitals and operate them profitably. Tight control over costs and efficiencies in such areas as staffing, purchasing, and

This case was prepared by Assistant Professor W. Carl Kester for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1983 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

This document is authorized for use only by Morgan Rom in Integrative Finance Spring 2015 taught by Hughes, Miller, Way, University of Texas at Austin from December 2014 to June 2015.

For the exclusive use of M. Rom, 2014.

Hospital Corporation of America (A)

hospital design enabled hospital management companies to offer high-quality services at reasonable cost while achieving attractive profit margins.
With the ability to sell equity and other financial securities not generally available to nonprofit hospitals, proprietary hospital management companies expanded rapidly...
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