Virtual Competition and Cost of Capital: Evidence from Telehealth
75 Pages Posted: 26 Apr 2021 Last revised: 6 Aug 2021
Date Written: April 24, 2021
Using the staggered implementation of telehealth parity laws in the U.S. Healthcare industry, we find causal evidence that virtual competition affects U.S. hospitals' cost of capital through a credit risk channel. Financial statements indicate that rural hospitals lose patients to urban hospitals in the same state after states require equivalent reimbursement of remote and in-person services. These effects increase rural hospital bankruptcy risk indicated by leverage and Z-Score. This increased financial stress translates into lower credit ratings and a higher cost of capital for rural hospitals. Controlling for bond characteristics, we find that affected rural hospitals' new bond costs rise by 20 - 38 bps relative to urban hospital bonds issued in the same state and in the same year. Secondary market yields of outstanding rural bonds increase by a significant 8 - 17 bps. Overall, we conclude that virtual competition in healthcare provision exacerbates healthcare inequality between rural and urban areas.
Keywords: telehealth, municipal bond, healthcare finance, healthcare inequality, bankruptcy
JEL Classification: G12, G31, H74, H75, I11, I14, L31
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