Capital financing

Chapter 3: Capital financing

This chapter will built on chapter 2 by explaining the contextual environment of the Dutch hospital sector.

It will focus on the major capital financing and real estate investment reforms in light of the building construction regime transition. Section 3.1 and 3.2 are provided as background reading for the interested reader, describing the developments in capital financing regulations up until the Wet Ziekenhuisvoorzieningen (WZV) in 1971. Finally, it will provide an answer to sub-question 4:

What are the potential effects of the regime change on capital financing of hospitals?

Capital financing prior to healthcare insurance

Up until World War II, capital and other means required to build healthcare institutions were financed by gifts, leasing and the returns from the sale of (church denomination-owned) capital. Municipal governments contributed by founding their own hospitals or by subsidizing religious and private organizations.

Sometimes land was granted to an institution.

Capital financing required for real estate investments usually occurred in a direct form. However, especially in case of major investments, some institutions issued bonds or arranged bank loans (Valk, 1951).

Typical to this system was that capital costs were not or only partially added up to tariffs for patients.

The more wealthy patients contributed to the exploitation costs of hospitals through higher tariffs. As a result, hospitals were able to charge the less privileged with lower tariffs and increased their capacity for new investments (Querido, 1960).

The accounting system of healthcare institutions was quite different as well. For example, only a minor distinction was made between running and capital costs. As a result, investments were not depreciated and real estate investments "disappeared" until another major investment was required. Commercial accounting was not introduced until the 1920s (Valk).

With the transition from "poor man's care" to "healthcare" during the first half of the 20th century, it became more challenging for hospitals to collect sufficient gifts to cover their real estate investments. Furthermore, the government was no longer able to finance these investments. Consequently, hospitals had to opt for loans.

As they were now forced to pay interest, interest and amortization became more substantial costs within healthcare tariffs (RVZ, 2006).

Capital financing until the Wet ziekenhuisvoorzieningen (1945-1971)

The Dutch government began to interfere with healthcare costs with the enactment of the Prijzenwet (Tarifflaw) in 1939. The aim of this law was to enable direct intervention in tariff setting. During the World War II occupation, capital was depreciated based on historic cost prices. Since prices were strictly regulated and did not increase, the fact that hospitals did not depreciate capital based on replacement value did not result in the transfer of building costs to the future.

After the war it was feared that replacement value depreciation would put too much pressure on healthcare tariffs. In 1948 depreciation was set at 2% for buildings, 5% for installations and 10% for inventory (Groot, 1960). These percentages remain unchanged today. In order to integrate interest payments, healthcare tariffs included 4% interest (later on, the real interest rate would be applied).

Though the government allowed for a number of tariff increases, the government did not increase the healthcare budget. Simultaneously, healthcare and building costs increased. As a result, institutions were forced to resort to bonds and bank loans.

The combination of increasing tariffs, regional differences in hospital design (tall hospital buildings in urban areas versus large regional hospitals), differences in asset balances, the age and condition of buildings and the access to cheap capital, resulted in major tariff differences between hospitals.

Furthermore, there were major differences in interest and depreciation costs (see table 3.1).

Hospitals were no longer able to finance future investments related to building replacement and expansion out of their own pockets.

The government reacted to this problem with various measures. From 1950 it would finance almost half (3/7) of the building costs of a new hospital (Groot, 1960) on the condition that hospitals were unable to finance these out of their own exploitation. The increased government interference could be traced to the 1951 healthcare budget, in which 0.32 mln out of total healthcare expenses of 26 mln was reserved for financing the building and renovation of institutions. Moreover, the government guaranteed interest and depreciation payments up to the amount of 40 mln (Valk 1951).

Another government measure was to distinguish between the responsibility of the hospital and the medical specialist. In 1949 the government decided that the specialist tariff would be based on the fact that the medical specialist finances the costs of his/her consultation room and laboratory. Therefore, hospitals were not responsible for all building costs. However, it proved to be difficult for hospitals to make agreements with medical specialists with regard to this issue.

In 1958, the measures stated above were abolished. Capital costs were completely integrated into healthcare tariffs. On specific conditions, the government guaranteed interest and loan payments to healthcare institutions (Garantieregeling inrichtingen voor gezondheidszorg, 1958). The government deemed it unfeasible to allow hospitals to integrate forecasted capital cost increases in their tariffs, as it feared hospitals would use additional liquidity to cover operating losses resulting from poor management and this would compromise the quality of healthcare. As a result, replacement cost increases were transferred to the future (Van Straaten, 1984).

From 1960 to 1970, the number of hospital beds increased dramatically: from 58.000 to 72.000 respectively (Juffermans, 1982). This "building surge" resulted both in an increasing number of hospitals and increasing economies of scale and affected the amount of capital required (see table 3.2). The government reacted by imposing the Wet Ziekenhuisvoorzieningen.

From WZV to first kapitaallastenbrief and WTZ (1971 - 2006)

The Wet Ziekenhuisvoorzieningen (WZV) was enacted on March 25 1971 to issue building licenses based on a national capacity planning system. The aim was to limit the number of new hospitals built.

However, since it proved infeasible to enforce this on a national level, capacity planning was delegated to a regional level. Gradually, the WZV was used to reduce healthcare costs. In 1984, the government introduced a so-called "building priority list" to ensure building expenses would not increase beyond limits.

Further, it promoted the formation of mergers in case of new building projects.

Building policy in the 1990s

The government's building policy at the end of the 1980s was marked by deregulation and a transition of responsibility to hospitals themselves. In 1996, the WZV was reformed drastically: the government's plans entailed a diffusion of acute healthcare, a transition to extramural healthcare, stakeholder meetings, a capacity standard to replace the number of beds standard, and a limit to the book value loss of new buildings. Furthermore, approval procedures for building projects were simplified.

Capital financing in the 1990s

At the end of the 1980s, the government abolished the guarantees it used to provide on new loans.

Combined with the development towards a more market driven healthcare sector, this resulted in uncertainty with investors and healthcare providers alike.

As risks were growing beyond an acceptable level, institutional investors such as the Bank Nederlandse Gemeenten (BNG, Dutch Municipalities Bank) withdrew from the healthcare sector and commercial banks included special clauses within their contracts.

This implied hospitals were now exposed to a number of financing risks. Therefore, the government designed the Waarborgfonds (Wbf, Guarantee Fund): financial risks were more equally spread and hospitals were able to borrow money more cheaply. Moreover, institutional investors renewed their activity in the healthcare market.

Cheap borrowing via guaranteed loans was an attractive option since the paid (short term) interest after 40 years of post-calculation based on actual costs, was now standardized based on the monthly Euribor[1] rate plus a premium (0,75%).

As a result, many institutions increased their amount of short term debt. In 2001 the long term interest rate was standardized as well based on the IRS[2] rate plus a premium. As of 2005, the obligatory ratio between short and long term debt financing (80/20 rule) was abolished.

Until 2004, the government did not calculate a compensation for inflation on the equity of healthcare institutions. Thus, healthcare institutions were only able to maintain their real level of equity if they financed the inflation out of their own pockets. However, in 2004 the government decided to grant healthcare institutions compensation for inflation.

Since a number of years the government has been promoting the transition from budget financing to product financing. Hospitals are the frontrunners with the introduction of "diagnose behandelingscombinaties" (DBC's, Diagnosis Treatment Combinations).

First kapitaallastenbrief: normatieve kapitaallasten componenten (2005)

On March 8 2005 the Dutch government outlined its policy regarding the future of capital financing in the healthcare sector. This was necessary as the liberalization of the healthcare sector and the abolishment of the so-called Bouwregime[3] implied healthcare institutions would be exposed to larger capital risks.

The so-called "kapitaallastenbrief" composed by the Dutch Health ministry aims to completely liberalize hospital building projects and to finance all investments prospectively. These plans are implemented gradually from 2008 on, will be finished in 2012, and concern both the current real estate portfolio as well as projects in the pipeline. Since hospitals will be exposed to risks over all their capital costs, investments will be more and more driven by expected returns. Hospitals will have the freedom to decide whether or not to invest and will have to ensure their capital costs and financing obligations will be covered by the tariffs they charge.

The underlying notion is that this will motivate them to operate more efficiently and become more customer-focused.

Hospitals become responsible for all differences in capacity utilization, financing costs of capital, managing future changes in capital needs and their position on the capital market, and more market driven balance sheet management. The latter also entails resolving and managing the so-called book value problems (implying the value of assets is too high on the balance sheet) and other problems related to the current real estate portfolio. On the other hand, many hospitals possess "hidden reserves" since the value of land is too low on the balance sheet (see section 4.1 of Chapter 4: Real estate investments).

Hospitals obtain standardized capital cost components (normatieve kapitaallasten componenten, nkc's) in the new situation. This implies building costs, including a compensation for the capital provided, will be included in their DBC-budget. These account for around 12% of total expenses, but this amount can differ significantly among hospitals.

Wet Toelating Zorginstellingen (2006)

On January 1st 2006, the WZv was replaced by the Wet Toelating Zorginstellingen (WTZi).

The aim of the WTZi is to increase freedom and responsibility for healthcare institutions by decreasing governmental interference with regard to building capacity and construction. Furthermore, the building construction regime is being deregulated. A license from the CBZ is only required for completely new projects and reconstruction plans that are on such a scale that a new project should be considered. In this case, the building construction plans will only be evaluated in advance (Hofman, et al., 2006).

Hospitals are no longer required to notify the government in case of building maintenance but are still required to design a long-term building plan for construction projects that require a building license by the CBZ. However, the annual funds in the budget for minor maintenance and the system of "drawing rights"[4] for midlife renovation are maintained.

Second kapitaallastenbrief & abolition of the construction regime (2007 - 2009)

The second kapitaallastenbrief (VWS, 2007) made the government's plans regarding the inclusion of the capital charges in the integral rates for healthcare and the abolition of the building construction regime more concrete. The building construction regime for the hospital sector has been abolished as of January 1 2008.

This implies that the license requirements for construction projects have ceased to exist. Furthermore, it implied the end of the post-calculated capital charges, making hospitals responsible for both costs and risks of their real estate.

As a result of the abolition of the construction regime, the main function of the College Bouw Zorginstellingen (CBZ), the institution which the government uses to monitor building projects in the healthcare sector, will cease to exist. The Health Minister plans to put an end to the CBZ as an separate administrative body by January 1, 2010. The task of monitoring the quality of hospital buildings will be allocated to the general quality monitoring by the Inspectie voor de Gezondheidszorg (Healthcare Inspection, IGZ). The knowledge and expertise of the CBZ will be integrated into a so-called "Centrum voor Zorg en Bouw" (CZB), which will be part of TNO (independent organization for applied scientific research in the Netherlands). Among others, the CZB will contribute to quality control of the buildings and supervision of the healthcare market, and will continue to act as a knowledge platform regarding healthcare construction (Vermeij, 2009).

Capital financing markets

Dutch hospitals mainly finance their capital needs with short and long term debt from banks. In the past, loans used to be placed with commercial banks, however, since the introduction of the Wbf hospitals have increasingly resorted to institutional banks such as the BNG. These banks, as a result of their guarantees, are granted with higher (AAA) ratings than commercial banks and are able to offer capital more cheaply.

There is ambiguity regarding the effects of a higher risk profile on the access of hospitals to these banks.

Other sources of capital, such as financing with the return on liquid assets, operating profit, issuing bonds and philanthropy play less large a role. However, currently hospitals are making a transition to leasing more of their (office-like) buildings (Bartels and van Schaik, 2004).

The financial monoculture currently marking hospital financing is likely to change when the policy plans set forth in the second kapitaallastenbrief are implemented. For example, hospitals will resort to more and different capital sources, resulting in more diverse financing constructions and a more dynamic market.

The United States provide a good illustration of these effects. Between 1997 and 2001, the financing mix of hospitals changed significantly as a result of poor financial results and some major bankruptcies (see table 3.3). Today, financing is sourced from various external capital sources. For example, the attractiveness of tax-exempt bonds depends on the real interest compensation combined with the accessibility of this market to healthcare institutions. This market is especially accessible to hospitals; however, as a result of some bankruptcies banks have largely withdrawn from financing hospital loans.

As access to external capital markets became more difficult, hospitals in the United States have increasingly resorted to internal financing. As a result, hospital CFO's were forced to aim at acceptable operating margins in order to create internal capital resources. An additional advantage is that this in turn eases the access to external capital. Data from the United States indicate operational margins should be larger than 5% in order to get easy access to bank financing (HFMA, 2003).

Moreover, the sale of real estate (offices, facilities, land etc.) has resulted in additional funds for other investments. The activities of Real Estate Investment Trusts (REITs) have increased significantly (HFMA, 2003). These investment vehicles lease specific real estate assets to healthcare institutions, often for a long term.

On the condition that they distribute 90% of annual revenues to shareholders, they are subject to a beneficial tax regime[5]. Lease-constructions are also increasingly used as financing sources in case of investments in equipment. As such, the degree of risk of technological ageing not included in the lease price, is transferred to the financing source.

Hospitals are responsible for attracting sufficient amounts of capital themselves. Their freedom of choice will increase when they are granted access to multiple capital sources. For example, the creation of a market for institutional bonds as seen in the United States. When investors have the opportunity to invest in bonds subject to similar conditions as investments in "green" products, this market could grow in the Netherlands as well. Investors will then get a 2.5% additional return on an investment in a hospital bond.

However, it should be noted that the US market is characterized by far less government interference and regulations compared to the Dutch one ("small" versus "big" government). This may turn capital financing market reform and innovations into a more strenuous process.

Access to capital

Access of hospitals to capital markets is determined by various financial indicators. Important indicators are solvability, operating margins, profitable growth (forecasts), a solid financial track record, management of working capital, sufficient liquidity to repay loans, and a positive return on investment. Depending on individual scores on these indicators, the financial position of hospitals can be determined by rating agencies such as Standard & Poor's or Moody's. The highest rating, AAA, results in the most beneficial conditions in acquiring capital and a low weighted average cost of capital (WACC).

However, even in more liberalized markets hospitals seldom have no access to capital at all as the risk perception related to a possible bankruptcy is quite low. The financial markets here assume that government intervention ensures their investment will not evaporate.

Although "hard" financial indicators are still highly relevant for investors, it is also interesting to consider the more "soft" conditions regarding capital access. For example, how sound is the organizational strategy and how does capital (access) contribute to the core-business activity and core competencies of an individual hospital? Which governance structure does the hospital apply and how does it maintain its relationships with medical professionals and other stakeholders?

Further, it is important to consider whether or not the management has explicit financial targets and commits itself to achieving those. Besides a positive operating result, standards regarding debt and equity, return on investment (ROI), and medium to long run expense levels are required.

PriceWaterhouseCoopers (PwC, mentions 4 corporate finance theory rules of thumb required for sound financial management of hospitals in the new system:

  • Investment decisions are based on a positive net present value (NPV);
  • The return on invested capital (ROIC) is larger than or equal to the WACC;
  • The debt service coverage ratio (DSCR) should be between 1,2 and 1,4;
  • The debt/equity (D/E) ratio should be lower than 75/25.

In addition, a recently published report by Fakton (Fakton, 2009) has calculated the WACC of (future) invested capital in hospital real estate as follows:

  • 15 % equity capital (compared to 30% in case of commercial real estate investments); the current hospital sector average is 10%;
  • The cost of equity capital is 6,10%;
  • 85% debt capital;
  • The cost of debt capital is 6,13% and composed of:
    • A 10-year IRS (currently 4,38%)[6]
    • A risk premium (1,75%)[7]
  • This results in a WACC of 6,13%.

As such, this is the minimal return on invested capital (ROIC) investors in hospital real estate require (see section 6.2.5 in Chapter 6: Quick-scan of the Dutch hospital sector).

However, currently hospitals are mainly aiming at ensuring that their expenses do not outgrow their budgets. Virtually all healthcare expenses are financed out of health insurance payments. The main advantage of this system is that the amount of capital costs are not directly linked to the national healthcare budget.

Health insurers finance building costs and therefore have an interest in the efficient use of capital.

Another feature of the Dutch healthcare sector is the almost complete absence of public or commercial healthcare institutions: it is dominated by non-profit foundations. The central government plays a role in shaping various conditions. Regional/local governments do not own hospitals and are not responsible for investments or budget deficits.

Transition to standardized capital cost tariffs and financial problems

As a result of the transition to standardized capital cost tariffs, some hospitals develop considerable financial reserves. Therefore, in the new situation hospitals could form a large amount of equity, while experiencing exploitation problems at the same time (see section 4.5 in Chapter 4: Real estate investments).

In the old situation, hospitals that experienced financial problems could call on a special buffer procedure of the College Sanering (Financial Recovery Board). For example, the College Sanering could decide to increase the tariffs temporarily to give a hospital the opportunity to resolve its financial problems. These costs were financed by insurance payers and the regional sickness funds. In case of a financial intervention under the new regime, it will have to be determined whether and how much hospitals have to contribute out of their own pockets and how much is financed out of health insurance payments.

Standardized capital costs

Important macro-economic determinants of the future demand for capital in the healthcare sector are the condition and age of the infrastructure, the ageing of the population, welfare trends, investment needs of medical professionals and historic investments. Based on these determinants, standards for the degree of positive or negative capital accumulation can be developed[8]. Thus, capital cost tariff standards can be based on an increase or decrease of capital intensity in the healthcare sector.

Another way to determine an appropriate capital expense level is to consider historical trends and expenses. For example, in the United States capital investments have decreased after Medicare imposed standardized capital cost components in 1992. Capital expenses between 1997 and 2001 only increased by 1%, while patient volumes increased by 7,7% (intramural) and 19,6% (extramural) (HFMA, 2004). Moreover, there are substantial differences between the capital expenses (per bed) among hospitals with easy ($ 245.000) and difficult ($ 216.000) access to capital.

However, capital expenses of hospitals in the United States have already been decreasing since the mid-1960s as can be seen in table 3.4 below. As such, Medicare did not result in a different trend. The main causes are the declining need for new hospitals, resulting from demographic and technological trends (it should be noted though that these costs are partially affected by a relatively high interest rate as well).

The same trend can be seen in Germany. Here, the capital expenses of sickness funds decreased from 27% in 1972 to 7,5% in 2001 (Bruckenberger, 2001). In the Netherlands, the total costs of depreciation and interest have decreased as well from 16% in 1971 to 14% in 1980 and 10% in 2004 (NZI 1971, 1981; Prismant, 2005).

Though new buildings used to be the most important cost category, new building costs have now decreased as a result of demand circumstances[9]. However, at the same time there is growing interest in flexible and sustainable building design and state-of-the-art ICT and medical equipment. This implies capital expenses have slightly shifted from long term depreciation investments (new buildings) to short term depreciation investments (ICT, equipment, redesign).

The investment selection

One of the most important implications of the kapitaallastenbrief is that hospital management can determine the amount of capital expenses themselves. For example, hospitals can decide to spend both more or less than the standardized capital cost tariff. Management will have to ensure it undertakes investments with a positive NPV to improve the financial situation of the hospital.

According to the Dutch Healthcare Council, the Raad voor Volksgezondheid en Zorg (RVZ, 2006), new investments should be relevant in terms of strategy, technological developments, the demand of patients, and market structure. It is important that investment can be traced to an overarching strategic business plan, and it should be clear how and to what extent investments contribute to turnover, operating margins and solvability of a hospital.

Legal structure and access to capital

There is a relationship between the policy plans in the kapitaallastenbrief and the transition to other legal structures and ownership constructions. This is because the importance of broad access to capital and the return on investment targets increase. An adequate allocation of ownerships rights is a way to achieve this.

For example, in the United States the specific legal structure is often tailored to the financial situation of a hospital.

One of the reasons to change the legal structure from non-profit foundations to a commercial organization (BV or NV in the Netherlands) is the access to risky capital. Examples are: share capital, convertible bonds and venture capital.

In many countries the rise of commercial healthcare organizations is related to the limited access of non-profit foundations to the financial markets. This is because non-profit foundations cannot issue shares, and because they have experienced public capital expense savings, less gifts, and limited efficiency growth.

Since issuers of share capital run larger risks, holders of share capital demand a higher return which is substantially larger than the return on state or guaranteed bank loans. As a result, share capital is relatively expensive. Only when investors expect a quick increase in profits the share value can reach a level at which a share emission is cheaper than bank financing.

Commercial organizations have access to multiple capital sources. Non-profit foundations use their own revenues, loans, bond issues, subsidies and mergers as capital sources. They can usually obtain capital at a lower price compared to profit organizations and usually pay no or less taxes. Furthermore, they do not pay dividends to shareholders and are subject to lower return requirements of debt issuers.

Easier access to capital of for-profit organizations especially plays a role in growth markets, certainly when there are prospects of large returns. For example, the rapid growth of specialized healthcare facilities in the United States (specialty hospitals and ambulatory surgery centers) and the consolidation of the German healthcare sector (e.g. Rhn Klinikum, Fresenius) are driven by profit-motivated providers. Non-profit foundations benefit from mature or declining markets since there is less need for new capital, and non-profit foundations can acquire the required replacement capital at beneficial conditions.

Governance of financial investors

One of the effects of the new situation will be increased supervision by the financial markets. Reasons are investment risks increase and have to be estimated more carefully. Banks will both adapt their tariffs to the new situation and increase supervision. Venture capitalists generally demand a vote in the Supervisory Council and influence regarding the choice of the management board. Commercial healthcare organizations have similar demands. These form joint ventures or consortia with a dominant role for the mother company. Shareholders have a more limited influence and do not have a direct vote in the organization's management. However, recently shareholders appear to gain in supervisory power.

Current developments

As a result of the system change, a number of trends are expected to occur. These include hospital mergers, joint ventures and greenfield investments, hospital acquisitions and conversions.


The RVZ (2006) expects that the kapitaallastenbrief will lead to more mergers, which is advantageous for hospitals in a weak financial position if they merge with a financially sound hospital. This enables them to get easier access to capital and can enhance the quality of healthcare provision. However, mergers also bring additional risks to the arena and can limit competition.

Examples of (horizontal) hospital mergers are Alysis Zorggroep ( Ziekenhuis Rijnstate - Ziekenhuis Zevenaar - Ziekenhuis Velp; 2000), Tergooi Ziekenhuizen (Ziekenhuis Hilversum - Ziekenhuis Gooi Noord; 2006), and Ommelander Ziekenhuissgroep (St. Lucas Ziekenhuis - Delfzicht Ziekenhuis; 2008).

Moreover, a recent development concerns vertical mergers. Vertical mergers arise when hospitals merge with health insurers and/or regional care-providers. However, these are controversial. Supporters argue such mergers can result in more efficiency, as the coordination of investment decisions of both parties is improved. It gives them more certainty regarding future profits. Critics say that a vertical merger limits competition if either one of both parties has a substantial degree of market power. For example, in case a local hospital charges other health insurers with higher tariffs after the merger, or when a locally dominant health insurer appoints its own hospital as preferred provider (van Damme, 2009; Bijlsma, et al., 2008).

Joint ventures

Another possibility is cooperation between hospitals and medical professionals. For example, through joint ventures and independent treatment centers (zelfstandige behandelingscentra, ZBCs). Most of these legal entities will probably operate for-profit, as this allows medical professionals to share in the revenues.

In the United States, for example, almost 95% of all certified ambulatory surgery centers are for-profit.

Acquisitions and conversions

The acquisition of non-profit foundations is a strenuous process as they do not possess share capital that can be acquired. Non-profit foundations have statutory objectives that determine what their assets are used for. For example, a non-profit foundation can sell its assets against market value and use the revenues to achieve its statutory objectives in a different way. However, in case of such a transaction, the interests of the management board do not always correspond to the interests of the trust. Therefore, an independent third party (i.e. the government, a judge) should examine whether a fair price has been paid and ensure that the conversion from a foundation into a commercial organization takes place in a rightful way.

Examples of recently acquired hospitals include the Slotervaartziekenhuis, acquired by Meromi Holdings in 2006, and the IJsselmeerziekenhuizen, acquired by the MC Groep in 2009. Upon its acquisition, the Slotervaartziekenhuis was converted into a BV (private limited liability organization); the IJsselmeerziekenhuizen are now 100% owned by the MC Groep. Both Meromi Holdings and the MC Groep are venture capital funds that specialize in (healthcare) real estate acquisitions. Such real estate venture capitalists consider the healthcare sector as an attractive market because of its stability and the (forecasted) increase in demand. The new regime forces hospital managers to control the risks related to real estate and analyze the relationship between real estate and health care provision. This opens up new opportunities for real estate companies. For example, by offering integrated facility management solutions. Last but not least, the reform of the Dutch law allows hospitals to distribute dividends to shareholders as of 2012. This allows venture capitalists and other investors to reap a return on their investments.

The acquisition strategy of these venture capitalists is characterized by taking over financially weak hospitals and making them profitable through financial restructuring and a revised real estate strategy. This includes giving specialists a vote in decisions concerning hospital exploitation and a more optimal utilization of capital and m. Loek Winter, chairman of the MC Groep, perceives the future of the Dutch hospital sector as marked by increased consolidation and the implementation of corporate governance structures (RVZ, 2006; van Dijk, 2006; Maassen, 2009; Bruinsma, 2009).


This chapter has provided an answer to sub-question 4:

Increasing financial responsibility

In 2005, the government published the first "kapitaallastenbrief", intended to liberalize hospital building projects and finance all investments prospectively in an attempt to abolish the ancient regime.

This concerns both the current real estate portfolio as well as projects in the pipeline. As investments are more and more driven by expected returns, the government's aim is to motivate hospitals to become more cost-efficient and customer focused at the same time. The second kapitaallastenbrief marked the real end of the old building construction regime for the hospital sector. This was abolished on January 1 2008. Hospitals are now responsible for both costs and risks of their real estate (investments).

Alternative capital financing sources

Dutch hospitals mainly finance their capital needs with short and long term debt from banks. It is unclear which precise effects the higher risk profile of hospitals will have on the access of hospitals to capital markets.

However, the financial monoculture currently marking the hospital sector is likely to change when the policy plans set forth in the second kapitaallastenbrief are implemented. Possibly, hospitals will use alternative capital financing constructions (e.g. sale-leaseback) and the market will become more dynamic. The United States provide an example. Here, tax exempt bonds, bank loans, philantrophy, lease constructions, equity, taxable bonds and real estate investment trusts (REITs) already play a dominant role in capital financing.

As the risk perception related to hospital bankruptcy is quite low, hospitals seldom have no access to capital at all. The financial markets here assume that government intervention ensures their investment will not evaporate.

Importance of hard and soft investment criteria

For investors, both hard and soft investment criteria will determine to which extent they are willing to invest in hospitals. For example, besides solvability, profitability and liquidity standards, the relationship between capital access and organizational strategy and competencies, and the governance structure will become important in the new system.

Alternative legal structures

The regime change is likely to lead to other legal structures and ownership constructions. This is because the importance of broad access to capital and the return on investment targets increase. One of the side-effects will be increased supervision by the financial markets. Reasons are investment risks increase and have to be estimated more carefully.

As a result of the system change, a number of ownership trends are expected to occur. These include a growing number of hospital mergers, joint ventures, hospital acquisitions and conversions.

Horizontal and vertical mergers can be to the benefit of financially weak hospitals, easing their access to capital. The downside is that they can limit competition.

Real estate venture capitalists consider the healthcare sector as an attractive market because of its stability and the (forecasted) increase in demand. They can provide financial restructuring, renewed real estate strategies, and integrated facility management solutions. When hospitals are allowed to distribute dividends to shareholders in 2012, venture capitalists and other investors can reap a return on their investments.

  1. Euribor = Euro Interbank Offered Rate, the rate at which a prime bank is willing to lend funds to another prime bank (OECD, 2001)
  2. Interest rate swap
  3. This is the building construction regime used in the old healthcare system.
  4. Drawing rights are the funds built up by hospitals between their 10th and 20th year of operation to finance midlife building renovations in later years.
  5. In case of investments in real estate, one is not required to pay company tax when property is personally owned. Therefore, it is not always attractive for investors without fiscal compensation to invest in real estate indirectly. REITs are constructions that equalize the fiscal differences between direct and indirect property.
  6. Based on the 10 year historic average of 10y government bonds
  7. Based on risk premium of BBB/A rating at 85% debt capital
  8. This implies new investments are either higher or lower than depreciation payments of current assets.
  9. A ratio of 1 indicates that both are equal. To illustrate: in 2001, 59% of hospitals scored higher than 1. Within this group, capital accumulation was largest in rural areas (3,44), in small hospitals with less than 100 beds (3,70) and hospitals owned by a church denomination (4,29). These hospitals were also characterized by positive operating margins and easy access to capital. The negative accumulation of capital appeared to be substantial (0,64 on average with hospitals scoring below 1).
  10. For example, the building surge during the welfare state period and the peak of polarization in Dutch society have ended, and the number of patient days in the cure sector has decreased.

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