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Evaluating the underlying factors behind variable rate debt

McCue, Michael J.; Kim, Tae Hyun (Tanny)

doi: 10.1097/01.HMR.0000296787.37342.a1

Background: Recent trends show a greater usage of variable rate debt among health care bond issues. In 2004, 63.4% of the total health care bonds issued were variable rate compared with 30.6% in 1995 (Fitch Ratings, 2005).

Purpose: The purpose of this study is to gain a better understanding of the underlying factors, credit spread, issue characteristics, and issuer factors behind why hospitals and health system borrowers select variable rate debt compared with fixed rate debt.

Methodology: From 2000 to 2004, this study sampled 230 newly issued tax-exempt bonds issued by acute care hospitals and health care systems that included both variable and fixed rate debt issues. Using a logistic regression model, hospitals with variable rate debt issues were assigned a value of 1, whereas hospitals with fixed rate debt issues were assigned a value of 0.

Findings: This study found a positive association between bond insurance and variable rate debt and a negative association between callable feature and variable rate debt. Facilities located in certificate-of-need states that possessed higher case mix acuity, earned higher profit margins, generated higher debt service coverage, and held less debt were more likely to issue variable rate debt.

Practice Implications: Overall, hospital managers and board members of hospitals possessing a strong financial performance have an interest in utilizing variable rate debt to lower their cost of capital. In addition, this outcome may also reflect that investment bankers are doing a better job in educating senior hospital management about the interest rate savings benefit of variable rate compared with fixed rate debt.

Michael J. McCue, DBA, is Professor, Department of Health Administration, Virginia Commonwealth University, Richmond. E-mail:

Tae Hyun (Tanny) Kim, PhD, is Assistant Professor, Department of Health Administration, College of Health Professions, Governors State University, University Park, Illinois.

© 2007 Lippincott Williams & Wilkins, Inc.