HEALTH TRACKING: MARKE TWAT C H the nonprofit hospital and our assumption price per procedure each hospital would have that it has a lower cost of equity financing to charge patients just to break even.At than the for profit hospital does. To isolate CMC's assumed cost of financing of 7.92 per he tax effect strictly, it is useful to calculate cent, that break-even price would be $666.At NPVs for the two hospitals on the assumption HCI's assumed higher cost of financing of that HCI's after-tax cost of debt is identical to 11.34 percent, that break-even price would be CMC's tax-exempt cost of debt and that $737, or 10.7 percent higher than CMC's HCI CMC's cost of equity capital is identical to would have to charge that differential to cover HCI's cost of equity capital Dn these assump p- its higher cost of financing and the income tions, the two hospitals would have the iden- taxes that it must pay but from which the tical WACC, which, for HCI, would be after nonprofit CMC is exempt taxes. Exhibit 2 shows the respective NPVs at To isolate how much that differential different assumed, common WACCs. As would be attributable strictly to the income shown in column 3 of the exhibits even if one tax preference enjoyed by CMC, one would imputed to the two hospitals the identical impute to both hospitals the identical WACC cost of financing, the not- for-profit CMC and then calculate the corresponding break would always have a decided economic ad- even prices(Exhibit 3). One can see that at vantage over the for-profit HCL. That advan- any assumed WACC, the for-profit hospital tage would be strictly the present value of the would have to charge much higher prices income-tax preference enjoyed by CMC merely to recoup its outlays on income taxes, Break-Even Prices a differential that rises with the assumed cost of financing. In reality, of course, for - profit When for-profit hospitals are found to charge hospitals pay not only income taxes but usu- higher prices for particular procedures than ally also higher property taxes than are paid nonprofit hospitals in the same market area by similarly situated nonprofit hospita harge, that is sometimes interpreted as price These higher taxes, too, would have to be re gouging by the for-profit hospital. It may be couped by the for-profit with higher prices oOn the other hand, as the preceding analy. other things being sis shows, it also could be an attempt by the A variety of loopholes available to corpora- for-profit hospital to compensate for its rela- tions can reduce the effective average tax rates tive economic disadvantage vis-a-vis its tax- they pay below the statutory rate of 35 per favored, nonprofit competitors cent. That circumstance, however, would al- To gain some perspective on this point, I ter the evaluation of a particular capital acqui recast the preceding analysis to inquire what sition only if these loopholes also shielded the EXHIBIT 2 Net Present Values(NPVs) At Common Cost-Of-Capital Rates For Two Hospitals, HCI And cMc Assumed cost NPV from the for-profit NPv from the nonprofit Extra NPv earned by of financing HcI's perspective CMC,s perspective the nonprofit hospltal $484,193 $433,655 9 percent 63000 351,341 414,341 10 percent 171,493 224,603 396095 11 percen 275,228 103622 378850 12 percent -374,476 11,935 13 percen 469,485 122,377 347108 14 percent 560.49o -227993 15 percent -647,710 329.052 318,658 SoURCE: Authors analysis. HEALTH A S bcr/D Reproduced with permission of the copyright owner. Further reproduction prohibited without permissionReproduced with permission of the copyright owner. Further reproduction prohibited without permission