Healthcare Facility Name: Mayo Clinic. Paper Example

Background Information: Mayo Clinic is a non-profit healthcare facility founded in the 1860s (About Mayo Clinic, 2020). The facility offers clinical practice, education as well as research. In general, Mayo Clinic deals with human health activities with services provided by healthcare experts. It is classified as a non-government company and is registered at the Registrar companies, the U.S. Also, the facility comprises of three major campuses for research; they are located in Minnesota, Arizona, and Florida states. As for the health system, the facility has several locations in the various states of the U.S. Gianrico Farrugia is the president and CEO of Mayo Clinic. Under his leadership, the facility has attained a $14 billion mark in its annual revenues with an operating income of more than $1 billion (About Mayo Clinic, 2020). It also has managed to offer employment to over 65,000 individuals (About Mayo Clinic, 2020). Health activities offered by Mayo Clinic have expanded to all 50 states and further to over 140 countries across the globe (About Mayo Clinic, 2020). The facility is ranked as the leading healthcare system in the U.S as well as by the World Report.

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Financial Situation: Mayo Clinic receives federal healthcare incentives every year in the form of Medicare and Medicaid dollars for its continued use of electronic health records. Besides, the facility receives research funding from the government, global foundations, industry groups, and benefactor gifts. Shares also fund the facility and it generates income from the sale of medicines and also from token fees paid by patients as nominal fees for treatment procedures. Other than that, patient inspection, as well as consultation fees, are sponsored by the facility, hence are never charged. The facility was in a strong financial position before the COVID-19 pandemic. A record performance was witnessed in 2019 where the facility made about $14 billion (Ellison, 2020). Currently, the facility has experienced income drops at a drastic rate. For instance, at March, the facility was forced to defer all elective care for at least eight weeks. The health system's operating expenses rose further across all categories, including salaries, supplies, and benefits. All these happened in the first quarter of 2020. The operating income dropped by 88% - $29 million in 2020 compared to $129 million in 2019 (Ellison, 2020). To counter the pandemic, the facility opted to receive $915 million in advance Medicare payments that are subject to repayment in future (Ellison, 2020). However, the facility has received about $220 million in grants covered in the Coronavirus Aid, Relief and Economic Security Act (Ellison, 2020).

Information: The healthcare facility is run as a non-profit organization and runs parallel with the Mayo Foundation (a charitable entity). The facility is, therefore, real and not fictitious. All details describing the facility are actual figures and facts derived from credible sources, including the company's website.

Short-term Debt Financing Options:

Bonds

`Like some other healthcare facilities, Mayo Clinic is a non-profit organization and therefore cannot issue stock. The facility can only turn to short-debt financing through the issuance of tax-exempt bonds. As for the profit entities, they bear the option of issuing stock as well as issuing tax-based bonds. Facilities that require this type of financing option must take into account their type of financing and debt-to-income ratio. In general, bonds are issued based on term of maturity, interest rate type (fixed or variable), utilization of bond insurance, and revenue vs general obligation bond.

Non-profit healthcare facilities mostly employ Fixed-rate bonds since they are the least risky debt structures available for borrowers. This type of bond shifts all the market risks to the investors, and the interest rate paid does not change with time – remains constant. Although the maturity of an issued bond may have a different interest rate, the investor purchasing the bond receives a fixed rate of return for the entire period during which the bonds are outstanding (Gapenski et al., 2007). Variable-rate bonds have the interest rates being reset on a regular basis. The interest rate fluctuates based on the current interest rate index, taking into consideration the changing market conditions. General obligation bonds are issued based on full faith and credit of the issuer. Revenue bonds are issued based on the revenue generated by the borrower.

Types of Bonds:

Zero-Coupon bond – Does not require coupon/interest paid at intermediate years. It also bears full redemption on maturity.

Plain Vanilla bond – Is the most straightforward bonds as it lacks unusual features. Contains a fixed coupon as well as a defined maturity. This bond is typically issued and redeemed at face value.

Deferred Coupon bond – Is a mixture of the coupon-bearing bond and the zero-coupon bond. It does not require any coupon payment during the initial years. However, a higher coupon is paid after the initial years, and this is done with the aim of compensation for the initial years.

Floating Rate bond – This is the variable-rate bond, and it has no fixed interest rate. However, the coupon is linked to a benchmark of the current interest rate index and the changing market conditions.

Direct Bank Loans

Compared to bonds, direct bank loans are not issued based on the underlying public credit score. Loans can be borrowed from a vast range of banks, and the process of acquiring a loan can be completed within a short timeline compared to other financial options. Direct loans can provide hospitals with an essential tool for gaining floating-rate exposure (Gapenski et al., 2007). As such, the loans present fewer risks that are associated with other market structures.

Direct loans are a better option for a healthcare facility that lacks access to other financing options because direct loans can yield reduced costs of capital. Direct loans can be either taxable or tax-exempt. Tax-exempt loans are given via a conduit agency, for instance, an authority or city and funded by the bank. Taxable loans are given directly by the bank hence no need for a conduit issuer. Direct loans can offer hospitals an option of "committed" funding for a given duration (Gapenski et al., 2007). However, after the loan term relapses, the loan should be renewed (and repriced), refinanced, or termed out if necessary (if renewal and refinancing are not available options).

Leasing

This represents a significant form of capital formation for investment in equipment as well as real estate by non-profit organizations such as healthcare facilities. There are two types of leases commonly employed in the healthcare settings: finance/capital leases and operating leases.

Capital lease – here, the lessee wants a long-term commitment to using an asset with or without eventuality of purchasing the asset.

Operating lease – this lease has no transfer of ownership interest or title between the two parties involved (lessee and lessor). Here, the lessee commits to making rent payments which are recorded as the operating expense.

Leases are commonly adopted in cases where other financing options are unsuccessful. They are also appropriate for smaller hospitals which lack access to public market alternatives (Gapenski et al., 2007). This could usually be true of short-lived assets for which long-term financing is inappropriate.

Comparison between Bonds, Direct Bank Loans, and Leases

Bonds have a wide variety of alternatives. A bond can be a zero-coupon or deferred coupon, implying no initial cash outflow. The other options might include initial cash outflow. Direct bank loans can also be customized to include a moratorium period which allows the borrower to defer the initial year's cash outflow of installments. Bonds and direct bank loans can be employed to suit capital and revenue expenditure. As for leasing, assets can be obtained on a lease, but not entirely, every expense can be catered with the leasing option. It is important to note that bonds bear relatively higher interest expenses compared to direct bank loans or leases.

Conclusion

Supposing Mayo Clinic is projected to face a cash shortage later this year, the facility can settle on the use of direct bank loans or the bonds with zero-coupon or deferred coupons. All these options are viable because if there is an anticipated cash shortage at the facility, then there will be hope to defer cash expenditures to the future. However, the best short-debt financing option is the issuance of a zero-coupon bond with a maturity of 4-6 years. The zero-coupon bond ensures that no coupon is paid at intermediate years hence offering the organization the opportunity to eliminate expenses. Also, full redemption at maturity is guaranteed.

References

About Mayo Clinic - About Us. (n.d.). Retrieved September 14, 2020, from https://www.mayoclinic.org/about-mayo-clinic

Ellison, A. (2020). Mayo Clinic's operating income drops 88% in Q1. Retrieved September 14, 2020, from https://www.beckershospitalreview.com/finance/mayo-clinic-s-operating-income-drops-88-in-q1.html

Gapenski, L. C., & Pink, G. H. (2007). Understanding healthcare financial management. Chicago: Health Administration Press. Retrieved from https://www.lsms.ac/public/uploads/DtF90LwFpZSSY5R4K7GXVvNKbmJKbh7qyKrW6y9Q0iaVb9ZOsC1575398941tmFi8spUNMWm0Ak9yGyVw3xfHz7OFj17iCIJQypcZsSZMPYCym.pdf