Virtual Competition and Cost of Capital: Evidence from Telehealth

75 Pages Posted: 26 Apr 2021 Last revised: 6 Aug 2021

See all articles by Kimberly Cornaggia

Kimberly Cornaggia

Pennsylvania State University - Department of Finance

Xuelin Li

University of South Carolina - Darla Moore School of Business

Zihan Ye

University of Nevada, Las Vegas

Date Written: April 24, 2021

Abstract

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

Suggested Citation

Cornaggia, Kimberly and Li, Xuelin and Ye, Zihan, Virtual Competition and Cost of Capital: Evidence from Telehealth (April 24, 2021). Available at SSRN: https://ssrn.com/abstract=3833193 or http://dx.doi.org/10.2139/ssrn.3833193

Kimberly Cornaggia

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

Xuelin Li (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

Zihan Ye

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

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