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

Abstract

This was a quasi-experimental research study exploring the relationship between long-term debt to 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 for the period 2015 to 2017.

The 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.

The study controlled for a health system's days of cash on hand and return on assets, both of which showed significant relationships with total margin and non-operating margin. 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 capital structure for an organization.