Derivative Financial Instruments and the Financial Management of Nonprofit Health Systems

36 Pages Posted: 6 Apr 2004

See all articles by Louis J. Stewart

Louis J. Stewart

Long Island University, Brooklyn Campus, School of Business, Public Administration and Information Sciences

Vincent Owhoso

Northern Kentucky University

Date Written: December 2003

Abstract

This paper examines the impact of derivative financial instruments use on the financial management of US nonprofit health systems. We review the existing literature on interest rate derivative instruments and US hospitals and health systems. There are several published papers have described the design of these derivative financial instruments from a theoretical perspective. Our contribution to the literature is to provide an empirical evaluation of derivative financial instruments usage by US nonprofit health systems. We present five case studies of US hospitals and integrated delivery systems that describe the design and operations of the fixed rate to floating rate swap, the floating rate to fixed rate swap, the basis swap, the interest rate cap, and the swaption. In each case study we examine the impact of derivative use across the dimensions of risk management, cash flow, and reported operating results. We conclude that interest rate swaps; caps, and swaptions are effective risk management tools. However, we also found that while these derivative financial instruments are useful hedges against the risks of issuing long term financing instruments, they also expose derivative users to additional credit and other risks. In conclusion, we find that these financial instruments can also generated negative as well as positive cash flows and have both a positive and negative impact on reported operating results.

Keywords: Derivatives, Financial Management, Nonprofit

JEL Classification: M41, M48, I19

Suggested Citation

Stewart, Louis J. and Owhoso, Vincent, Derivative Financial Instruments and the Financial Management of Nonprofit Health Systems (December 2003). American Accounting Association 2004 Mid-Atlantic Region Meeting Paper. Available at SSRN: https://ssrn.com/abstract=489242 or http://dx.doi.org/10.2139/ssrn.489242

Louis J. Stewart (Contact Author)

Long Island University, Brooklyn Campus, School of Business, Public Administration and Information Sciences ( email )

1 University Plaza - H700
Brooklyn, NY 11201
United States
718-246-6462 (Phone)
718-488-1195 (Fax)

Vincent Owhoso

Northern Kentucky University ( email )

Highland Heights, KY 41099

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