HealthLawProf Blog

Editor: Katharine Van Tassel
Case Western Reserve University School of Law

Friday, June 18, 2021

Virtual Competition and Cost of Capital: Evidence from Telehealth

Kimberly Rodgers Cornaggia (Pennsylvania State University), Xuelin Li (University of South Carolina), Zihan Ye (University of Nevada, Las Vegas), Virtual Competition and Cost of Capital: Evidence from Telehealth, SSRN:

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.

https://lawprofessors.typepad.com/healthlawprof_blog/2021/06/virtual-competition-and-cost-of-capital-evidence-from-telehealth.html

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