Case Study in Coporate Finance

br Background

Healthcare Corporation (formerly National Medical Enterprises . This subsidiary deals with end stage renal business or dialysis services business . between the years of 1995 and 1998 . As a result of this growth strategy the company became the second largest dialysis company in the United States

The company provides services for End Stage Renal Disease (ESRD patients by way of dialysis treatment (the only other treatment being kidney transplants . By end of 1996 , there were 214 ,103 people receiving chronic dialysis treatment

In December 1999 , the company had about 40

,000 patients in 488 facilities in the United States . services to about 330 hospitals . It also serves 5300 patients in 84 clinics in Argentina , Europe , Hawaii , Puerto Rico and Guam

At the same time in 1999 , the company was experiencing class action filings and complaints of financial malpractice . This led to recorded asset impairment and valuation losses of 120 million and increase in provision of aged accounts receivable (bad debts ) of close to 58 million in the fourth quarter

Key Issues

The key issues (already happening ) in the company today

A side effect of the rapid merger strategy is that the company is burdened with huge long-term debt and the resulting interest payments The current long-term debt is 5 .6 million . This is a great improvement over the 1 .2 billion owed in 1998 . But there is potentially callable long-term debt of 1 .4 billion . In 2000 , scheduled interest payments were 135 million (Exhibit 4

Another issue caused by the aggressive growth strategy of the company is that there is ineffective administration in the areas of billing and collections . There is a bad debt of 133 million in 1999 (Exhibit 5

There is less opportunity for acquisitions because of the trend towards consolidation in the industry . There are fewer small companies for Renal Care to buy over . Consolidation has the advantage of creating a centralized system that makes it easy for the company to practice cost control . Also , the bigger company has better purchasing power . It can buy medical supplies , pharmaceutical and medical equipment at a lower price because it is buying in bulk

Risks

The possible risks that have the possibility to occur in Care are

The Medicare program is the primary source of revenue for dialysis service providers like payers reimburse for treatments at higher rates . So , there is less profitability unless HMOs , Managed Care and Other Carriers are being targeted more and the client base can be increased

There is a lot of competition in this market . Contracts are awarded to smaller number of providers who will give dialysis services at lower rates and who will accept the restrictions . This results in price wars and less profitability

Recommendations and detailed support for recommendations

The company needs to do honor scheduled interest and principal payments so it can come out of debt (Exhibit 5

It needs to work on operational efficiency . It is big enough to take advantage of better purchasing power . So it can buy medical supplies pharmaceutical...