Health Care Organizations and bankruptcy

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Health Care Organizations and bankruptcy

The following discussion leads to 3 questions below, each requiring no more than a 50-100 word response. Use the attached material to help answer the questions.

Many believe that moderncapital structuretheory began when Professors Modigliani and Miller (better known as the first M&M) published their 1958 paper,The Cost of Capital, CorporationFinanceand the Theory of Investment. In their paper, M&M showed, under a very restrictive set of assumptions, that a firm`s value is unaffected by its capital structure. In other words, M&M suggested that it does not matter how a firm finances its operations, hence capital structure is irrelevant.

Their initial paper had a number of critics, especially since the study was based on some rather unrealistic assumptions. Nevertheless, M&M`s irrelevance result is very important to the theory of corporate finance. By indicating the conditions under which capital structure is irrelevant, M&M also provides readers with clues about what is required for capital structure to be relevant and hence to affect a firm`s value.

M&M published several more studies which expanded the concepts in their 1958 article, and directly addressed critics` comments. The resulting "M&M Theorems" on capital structure and dividend policy are an essential element of the foundations of the theory of corporate finance. M&M`s efforts in this area were among the achievements which resulted in a Nobel Prize for both authors in 1990.

McLean does a pretty good job of reviewing M&M`s work (starting on page 254). It is noted that M&M`s irrelevance results depend on the assumption that firms do not go bankrupt; hence there are nobankruptcycosts. However, in practice bankruptcy exists, and it can be quite costly, as shown in McLean. Note, too, that the threat of bankruptcy also brings about multiple problems for the firm.

Recent OIG reports (http://oig.hhs.gov/) show thatfinancial distressis the top reason for hospital closures in the US. Since bankruptcy is an available option for dealing with financial distress I would like to get your views on this issue.


1. What does a bankruptcy actually do for a HCO? Include a discussion of the types of bankruptcy available to HCOs in your response. How does the threat of bankruptcy affect the HCO?

2. Whatoptions, other than bankruptcy, are available to the HCO suffering from severe financial distress?

3. Do you see any trends in HCO bankruptcy? Can you provide an example of a HCO which used bankruptcy to deal with financial problems?

Please be concise, no more than 50-100 words for each question. Thank you

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