1. Jonathan Vogel advocates the Explanationist response to the Deceiver Argument for skepticism about the external world. On the basis of the information available on the slides, it is most likely that Vogel counts as:

a. an idealist.

b. a skeptic about the external world.

c. an indirect realist about the external world.

d. an anti-realist about knowledge.

2. Michael Huemer’s ‘How Can You Get Outside Your Head?’ argument argument concludes that ‘we have no knowledge of the physical world.’ Given the reasoning that his argument summarizes, is the ‘of the physical world’ qualification important? If so, why?

a. No, it’s not important. The reasoning leads equally to the conclusion that we have no knowledge of anything at all.

b. Yes, it’s important. We often have good evidence for what goes on in our own minds, in the form of the results of fMRI scans. So, the argument allows that we can sometimes know what goes on in our own minds, even if we can’t know what goes on outside our minds.

c. Yes, it’s important. According to the argument, we are never directly aware of electrons, atoms, or molecules. We only directly aware of middle-sized things, such as tables and chairs. We might know about tables, but not about electrons.

d. Yes, it’s important. According to the argument, we are never directly aware of physical objects. We are only directly aware of sense data (mental images, experiences, etc.), which are in our minds. We might know about sense data, but not about external things like tables.

Suppose that you are in a situation that is correctly described by the following decision matrix:

Coin lands heads (probability=.5)

Coin lands tails (probability=.5)

Play the game

utility=1,000,000

utility= -999,999

Don’t play the game

utility=0

utility=0

3. According to MaxEU:

a. morality requires you to play the game.

b. morality requires you not to play the game.

c. rationality requires you to play the game.

d. rationality requires you not to play the game.

4. In lecture, we discussed the Modest Response to the Argument from Evil. Initially, it seems plausible that some actual evils are gratuitous, on the grounds that we are unable to detect any justification for those evils, even after careful consideration. As Professor Gilmore explained in lecture, skeptical theists have replied to this by arguing that:

a. justifications for permitting the given evils are like dogs in a garage: if they were there, we would see them. So we are justified in believing that there is no justification for the evils in question.

b. justifications for permitting the given evils are like fleas in a garage: even if they were there, we probably wouldn’t see them. So we are not justified in believing that there is no justification for the evils in question.

c. the justification for permitting the evils is that they are necessary by-products of free will, whose value outweighs and compensates for the evils in question.

d. the justification for permitting evil is that God freely chose to do so, and whatever God freely chooses to do is justified, since free will is so valuable.

Argument (i)

P1 An action A is morally permissible if and only if no other action that is open to the agent of A at the time of A has a greater utility than A does.

P2 All human actions are causally determined by events in the distant past.

P3 If all human actions are causally determined by events in the distant past, then for any human action A that is actually performed, no other action aside from A is open to the agent of A at the time of A.

P4 If, for any human action A that is actually performed, no other action aside from A is open to the agent of A at the time of A, then for any human action A that is actually performed, no other action that is open to the agent of A has a greater utility than A does.

P5 Dylann Roof’s firing on church-goers is a human action that was actually performed.

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

: . Dylann Roof’s firing on church-goers was morally permissible.

Most of us will want to say that this conclusion is false. But if the conclusion is false, there must be some specific problem with Argument (i). Different philosophical positions yield different verdicts about where the argument goes wrong.

5. According to libertarianism (interpreted as a view about free will, not as a political view):

a. P1, at least, is false. Other premises may be false as well.

b. P2, at least, is false. Other premises may be false as well.

c. P3, at least, is false. Other premises may be false as well.

d. P4, at least, is false. Other premises may be false as well.

6. According to non-consequentialist ethical theories, such as Ross’s theory or some theory that includes the Doctrine of Double Effect:

a. P1, at least, is false. Other premises may be false as well.

b. P2, at least, is false. Other premises may be false as well.

c. P3, at least, is false. Other premises may be false as well.

d. P4, at least, is false. Other premises may be false as well.

7. Assume that you are a utilitarian and a soft determinist. Assume that you grant that the Roof shooting was a human action that was actually performed. Assume that you deny the conclusion of Argument (i). Holding all that fixed, which of following should you consider to be the best criticism of Argument (i)?

a. P1 is false. Some actions (e.g., Roof’s) are not permissible even though no other action open to the agent had a higher utility.

b. P2 is false. If time could be rewound to instant t in 1950, for example, events could play out differently thereafter, without any violation of the laws of physics or any difference in how things were at t. The same goes for the time of Roof’s action. He could have refrained from doing it, without violating any laws of physics.

c. P3 is false. Even though Roof’s action was causally determined by events in the distant past, it was still a free action, since it was caused in the right way by his beliefs and desires; and there were other actions open to him, in the sense that, if he had wanted and chosen to do those other actions instead, he would have done them; nothing external would have stood in his way.

d. The conclusion is obviously false. Roof’s action caused a huge amount of pain and suffering for many innocent people, and there was no positive justification for it. It involved treating other people as mere means, and it involved treating people in a way that the agent would not like to be treated by them. Regardless of which normative ethical theory you accept — for example, utilitarianism, ethical egoism, Ross’s theory— you should agree that Roof’s action was deeply wrong.

8. According to the lectures,

a. numerical identity is represented by ‘=’ and applies only to numbers.

b. numerical identity is represented by ‘=’ and applies to everything, not just numbers.

c. strictly speaking, nothing is numerically identical even to itself.

d. numerical identity applies to everything, not just numbers. To say that x is numerically identical to y is just to say that x is exactly similar to y.

e. x is numerically identical to y if and only if x has at least one property in common with y.

9. According to the lectures,

a. numerical identity and qualitative identity are the same thing.

b. ‘x is numerically identical to y’ means that x and y are exactly alike, i.e., exactly similar. ‘x is qualitatively identical to y’ means that x and y are one and the same thing.

c. ‘x is numerically identical to y’ means that x and y are one and the same thing. ‘x is qualitatively identical to y’ means that x and y are exactly alike, i.e., exactly similar.

d. qualitative identity is just identity, as applied to properties, whereas numerical identity is just identity, as applied to numbers.

10. Soft determinists and libertarians agree that

a. the existence of free will is compatible with determinism.

b. people at least sometimes act freely.

c. the laws of nature are deterministic.

d. the existence of free will is not compatible with determinism.

e. the past, together with the laws of nature, do not determine the future.

11. Soft determinists and hard determinists agree that

a. the existence of free will is compatible with determinism.

b. people at least sometimes act freely.

c. the laws of nature are deterministic.

d. the existence of free will is not compatible with determinism.

e. the past, together with the laws of nature, do not determine the future.

12. Libertarians and hard determinists agree that

a. the existence of free will is compatible with determinism.

b. people at least sometimes act freely.

c. the laws of nature are deterministic.

d. the existence of free will is not compatible with determinism.

e. the past, together with the laws of nature, do not determine the future.

13. Sider’s example involving one million perfect duplicates of Hitler is meant to show that

a. if quantum mechanics is true, then the laws of nature are not deterministic. The past and present together with the laws of nature do not determine all the facts about which future events will occur. They only determine the facts about the probabilities of those events.

b. if quantum mechanics is true, then the laws of nature are deterministic. The past and present together with the laws of nature determine all the fact about which future events will occur.

c. agent causal libertarianism is plausible if quantum mechanics is true, but not otherwise.

d. agent causal libertarianism is plausible only if agent causation can disrupt the probabilities of future events, but if quantum mechanics is true, agent causation cannot do.

14. Compatibilists say that:

a. we have free will and, although the laws of nature are deterministic, that’s only because we have freely chosen to make them so.

b. although the laws of nature are deterministic, we are still free, and in fact we often violate the laws of nature. (We did this whenever we act freely against what we were determined to do.)

c. even if all of our actions are causally determined by the past plus the laws, that wouldn’t rule out our acting freely, because free action isn’t uncaused action; it’s action that has the right sort of internal cause.

d. Libertarianism is compatible with Hard Determinism.

15. According to the Indiscernibility of Identicals,

a. if no one can tell objects o1 and o2 apart, then o1 and o2 are identical.

b. if objects o1 and 2 are not identical, then they do not have exactly the same properties.

c. if no one can tell objects o1 and o2 apart, then o1 and o2 are exactly alike.

d. if objects o1 and o2 have exactly the same properties, then they are identical.

e. if objects o1 and o2 do not have exactly the same properties, then they are not identical.

16. Consider this simple memory theory of personal identity: x is the same person as y if and only if x can remember y’s thoughts. Thomas Reid’s counterexample concerning the transitivity of identity shows:

a. that since it might turn out that (1) I remember what I was thinking yesterday, and (2) yesterday I remembered what I was thinking the day before, (3) I don’t currently remember what I was thinking 2 days ago, and since (4) identity is transitive, it follows that the above theory is false.

b. that since it might turn out that (1) I remember what I was thinking yesterday, and (2) yesterday I remembered what I was thinking the day before, (3) I don’t remember what I was thinking 2 days ago, and since (4) identity is transitive, it follows that the above theory is true.

c. that since I can remember what I was doing yesterday and the day before, it follows that I am identical to the both people.

d. that since the relation “x remembered what y was thinking” is transitive, the above theory must be true.

17. According to Shoemaker, the brain transfer case is problematic for the body theory of personal identity because:

a. it seems right to say that my soul wouldn’t know whether to follow my brain or remain in my body.

b. it seems right to say that brain transfers are not really physically possible.

c. it seems right to say that I would go where my brain goes, not where my body goes.

d. it seems right to say that I would stay where my body stays, not go where my brain goes.

18. Suppose that, unbeknownst to me, the soul of a WWI war criminal was attached to my body at birth. At first glance at least, according to the __________________ of personal identity, I should be held responsible for the war criminal’s actions because _________________.

a. psychological continuity theory; according to this theory, souls guarantee psychological continuity.

b. soul theory; according to this theory, the war criminal and I are psychologically continuous.

c. soul theory; according to this theory, I am numerically identical to the WWI war criminal.

d. body theory; according to this theory, identity of soul is sufficient for identity of body.

19. The Body Theory faces a potential problem (discussed in lecture) involving corpses. According to the given argument against the Body Theory:

a. we cease to exist when we die, but our bodies typically do not.

b. bodies are divisible, but we are not.

c. we have mental properties, but our bodies do not.

d. my body and I are made of different matter.

e. corpses are made out of matter, but we are not.

20. Suppose that Nestor was an ancient Greek warrior who committed many crimes. Further, suppose that I exist in 2018 and have no memory of doing what Nestor did. Finally, suppose that Nestor and I have the same soul. It follows that:

a. Nestor and I have different brains.

b. Nestor and I have the same brain.

c. if I am the same person as Nestor, then the soul theory is true.

d. if the soul theory is true, then I am the same person as Nestor.

21. Suppose that I begin my life in one body, body1, but that later in life my brain is transplanted into a different body, body2. Further, suppose that after the transplant, I wake up the next morning and have body2 as my body (but I continue to have my same old brain). It follows that:

a. The Body Theory is not true.

b. The Body Theory is true.

c. The Brain Theory is not true.

d. The Brain Theory is true.

e. None of the above.

22. In lecture, we discussed one main argument against the Memory Theory of Personal Identity, an argument which did not apply to the Psychological Continuity Theory of Personal Identity. According to that argument:

a. The Memory Theory cannot handle the possibility of cases of personal fission.

b. identity is transitive (if a=b and b=c, then a=c), whereas being able to remember having some experience that person p once had is not transitive (as Thomas Reid’s ‘Brave Officer’ example brings out).

c. The memory theory is incompatible with the possibility of life after death.

d. all memory theories of personal identity are vulnerable to ‘reduplication problems’.

e. as Sydney Shoemaker and others have pointed out, the concept of memory must be analyzed in terms of identity (to distinguish it from various forms of pseudo-memory), hence any attempt to analyze the concept of personal identity in terms of memory would be viciously circular.

23. Shoemaker’s Brown/Brownson argument, if successful, would show that sameness of body is _______ for personal identity. (According to Shoemaker, there are two bodies in the case: Body B and Body R. Brown has Body B on day 1 and Robinson has Body R on day 1. On day 2, after the brain transplant, Brown, not Robinson, has Body R, and Brown no longer has Body B , according to Shoemaker.)

a. not sufficient

b. neither necessary nor sufficient

c. not necessary

d. both necessary and sufficient

24. What does Descartes think that he has accomplished in the Cogito?

a. He has found that he cannot doubt the existence of external objects.

b. He has shown that he can doubt the existence of every material thing.

c. He has proved that we are all conscious.

d. He has discovered, for the first time, a truth of which he can be absolutely certain – that he exists.

e. He has demonstrated the existence of God.

25. Why did Russell find the Cogito unconvincing?

a. Because the reasoning of the Cogito can be conducted even in the absence of any consciousness, thinking, or mental activity.

b. Because it relies on a prior insight to the effect that certain inference rules are valid, and if so then it cannot deliver ‘something from nothing’.

c. Because Russell had convincing proofs of the non-existence of God, which he took to carry more weight than Descartes’ argument.

d. Because the existence of external objects is knowable a priori.

e. Because, what is certain from ‘in here’ is not that I am thinking/experiencing, but merely that there are thoughts/experiences.

26. What, according to Gilmore, is the problem with Russell’s objection to the Cogito?

a. There can’t be thoughts without a thinker. So, given that Russell admits that it’s certain that there are thoughts, he must admit that it is certain that they have a thinker, i.e., that he exists.

b. Russell thinks that it’s certain that there are thoughts. But that’s not certain. For all Russell can tell, it might just be that there’s an illusion that there are thoughts.

c. If Russell’s objection were right, it wouldn’t be certain, from ‘in here’, that (IZ) is false: (IZ) others exist and have thoughts, and I exist, but I’m unconscious and have no thoughts. But it is certain, on the basis of introspection, that (IZ) is false.

d. None of the above.

27. Theism is the view that:

a. the supreme being is the word ‘the’.

b. at least one god exists.

c. God does not exist.

d. the mind is separate from the body.

28. Anselm thinks that a being than which none greater can be conceived cannot exist in the understanding alone. Why?

a. Because, if it existed in the understanding alone, a contradiction would result – specifically: the thing in question both (i) would be a being than which none greater can be conceived (by hypothesis), and (ii) would not be a being than which none greater can be conceived (since, because it exists in the understanding alone, its degree of greatness is exceeded by a different degree of greatness that we can conceive of something as having: a being just like the thing in question except that it exists in reality too).

b. Because the understanding is finite, whereas a being than which none greater can be conceived would be infinite, and no infinite being can exist in a finite realm. In other words, our minds are not capable of comprehending such a being, and hence it cannot exist in the understanding at all.

c. Because, for any degree of greatness, D, that it is possible for us to conceive of some being as having, there is some other degree of greatness, D+, that meets both of the following conditions: (i) D+ exceeds D, and (ii) it is possible for someone to conceive of something as having D+. Roughly put, for any conceivable being, a greater can be conceived. Hence, it is impossible for a being than which none greater can be conceived to exist in our understanding.

d. Because the understanding is a part of reality; hence anything that exists in the understanding also exists in reality; hence nothing exists in the understanding but not in reality. I.e., nothing exists in the understanding alone. It follows that anything that we can conceive of exists not merely in the mind but also in reality. In particular, since we can conceive that there is a being, o, and a degree of greatness D, such that [for any degree of greatness, D*, if D* exceeds D, then it is not possible for someone to conceive that something has D*], it follows that such a being exists both in our minds and in external reality.

29. In the lectures, a version of Guanilo’s objection to Anselm’s argument was presented. This version of Gaunilo’s objection aimed to show that Anselm’s argument:

a. has a false conclusion

b. has at least one false premise

c. was invalid

d. proved the existence of a perfect island

30. According to the lectures, the main problem with Anselm’s ontological argument (as we reconstructed it) was that

a. its first premise rests on the implausible principle that if one has a coherent F-concept, then there is an F that exists in one’s understanding.

b. its first premise rests on the implausible principle that existing in the understanding and existing in reality are mutually exclusive.

c. its first premise rests on the implausible principle that existence is a predicate. (Existence, if there is such a thing, is a property, not a predicate. The verb ‘exists’ may be a predicate, but existence itself is not.)

d. its second premise rests on the implausible principle that existence is a predicate. (Existence, if there is such a thing, is a property, not a predicate. The verb ‘exists’ may be a predicate, but existence itself is not.)

e. its second premise rests on the implausible principle that for any two things, x and y, if x exists in reality and y does not, but x and y are otherwise as similar as it is possible for them to be, then all things considered, x is greater than y.

31. As stated in lecture, the first premise of the Kalam Cosmological argument is, “Whatever begins to exist has a cause.” Why is it important to use that premise, instead of the simpler premise, “Whatever exists has a cause”?

a. Because there is no plausible claim that can be combined with the simpler premise to yield a valid argument for the conclusion “The universe has a cause”.

b. Because Aristotle distinguishes formal cause from efficient cause, and the simpler premise is incompatible with that distinction.

c. Because Al Ghazali did not believe that the universe exists, only that it existed.

d. Because the simpler premise would force the theist to say that God had a cause.

32. Pascal’s Wager aimed to show that:

a. the proposition that God exists is likely to be true.

b. we shouldn’t believe in the existence of God if God’s existence has low probability

c. only one description of God is right

d. we have practical reasons to believe that God exists.

33. In lecture, some problems were raised for Pascal’s Wager. One of those problems was that:

a. there are too many different gods that one could believe in. The expected utility of believing in some god is higher than the expected utility of believing in no god, but the difference is so small as to be of no practical importance.

b. if we become believers in God in the hope of getting a reward, it might still turn out that there is no God, and hence we get no reward, but we have given up a great deal of pleasure on Earth by living a pious lifestyle.

c. there might be a Bizarro God that punishes believers with eternal damnation and rewards nonbelievers with eternal happiness in the afterlife. This cancels out any supposed gain in expected utility from being a believer.

d. Pascal’s Wager does show that practical rationality demands that we believe in God, but it does not show that theism is likely to be true.

Consider the following argument:

P1 If there were an omnipotent and omnibenevolent God, then there would not be any evils – bad situations.

P2 There are evils.

C Therefore, there is no omnipotent and omnibenevolent God.

Now consider the following objection to this argument:

Perhaps an omnipotent and omnibenevolent God would permit evils that are logically necessary for some adequately compensating good, or for the avoidance of something worse.

34. According to Professor Gilmore in lecture, how does this objection bear upon the argument above?

a. It casts doubt on P1.

b. It casts doubt on P2.

c. It casts doubt on C.

d. It gives us reason for doubting that C follows from P1 and P2.

35. Suppose that person A, in all sincerity, gives an argument for a conclusion C, where (unbeknownst to A) conclusion C is false. Person B suspects that C is false and attempts to address A’s argument in the following way: B considers C carefully, and then B respectfully offers a new argument against C that seems more powerful than A’s argument in support of C. Person A in the end is unsure what to think. According to Professor Gilmore in lecture, is B’s response an ideal way to address A’s argument? Why or why not?

a. Yes. B is giving reasons rather than merely making an assertion or an appeal to authority.

b. No. An ideal response would convince A that B is right, which B has not yet done.

c. Yes. B has approached the issue in a thoughtful manner and with a respectful, non-adversarial tone.

d. No. Since conclusion C is false, there must be something wrong with A’s argument for C. An ideal way of addressing the argument would specify the problem with the argument, rather than merely attacking the conclusion.

Review the Means and Olarte article, “Today’s Trends in Capital Financing” from the unit studies and consider the following questions and post your response:

• What are the major trends in health care finance?
• How will these major trends affect the provision of quality services?

today’s trends in capital financing

Means, Gerry A; Olarte, Marcelo L . Healthcare Financial Management ; Westchester Vol. 67, Iss. 5, (May 2013): 60-6.

ABSTRACT

The year 2012 saw not-for-profit health systems continuing to review their capital structures and find ways to finance needed capital expenditures. A major trend in 2012, likely to continue in 2013, was the emergence of financing vehicles offering low cost of capital, increased flexibility, and quicker access to funds. Nonetheless, a good deal of uncertainty persists in the market and in the industry as a whole. Amid general industry and regulatory pressures, healthcare borrowers should proceed with care, performing rigorous analysis and stress testing before seeking access to the capital markets. Despite the relatively strong market, the healthcare industry remains challenged due to the slower rebound of the US’ economy, the trend of declining patient volumes, pressures on reimbursement, and the overall uncertainty of healthcare reform. A primary focus for management teams is to reduce and mitigate risk and to diversify existing capital structures.

FULL TEXT

Headnote

Funding for capital projects is readily available to health systems of all sizes in 2013, but providers should conduct risk analyses before moving forward.

The year 2012 saw not-for-profit health systems continuing to review their capital structures and find ways to finance needed capital expenditures. As in the past, their spending projects were focused predominantly on facility improvements, new technology, and the funding of important strategic initiatives. A major trend in 2013, likely to continue in 2?3, was the emergence of financing vehicles offering low cost of capital, increased flexibility, and quicker access to funds. Nonetheless, a good deal of uncertainty persists in the market and in the industry as a whole.

Amid general industry and regulatory pressures, healthcare borrowers should proceed with care, performing rigorous analysis and stress testing before seeking access to the capital markets. Market Environment

The volume of public offerings for healthcare borrowers increased slightly in 2012. The debt was issued primarily to convert variable rate debt, refund higher interest-rate debt, and develop new strategic capital projects. Investor interest remained robust at all rating levels in health care-the result of a steadily declining volume of new issues during the previous four years.

This pattern has continued in 20i3, with the expectation that interest rates across the curve will remain low as borrowers continue to refund debt for interest cost savings. New money issuance also is likely to remain steady, because healthcare organizations must fund strategic capital needs while preserving liquidity.

Despite the relatively strong market, the healthcare industry remains challenged due to the slower rebound of the nation’s economy, the trend of declining patient volumes, pressures on reimbursement, and the overall uncertainty of healthcare reform. Facing an environment of increased competition and rapid consolidation, a number of providers have been compelled to pursue partnerships to prepare for the anticipated challenges ahead.

To overcome these obstacles and build themselves into stronger, more efficient care providers, health systems across the country are reevaluating their financial and capital risk profiles and taking advantage of different

financing vehicles to satisfy their internal risk thresholds.

Risk Analysis and Mitigation

A primary focus for management teams is to reduce and mitigate risk and to diversify existing capital structures. Indeed, many health systems are willing to accept what might seem to be a weaker financial profile, and the risk of rating pressure that goes with it, to achieve strategic and capital profile objectives. Health systems are using flexible financing products that are free of the typical limitations of traditional tax-exempt bond issues. This flexibility allows them to respond quickly to the constantly changing environment, where strategic opportunities require swift and decisive action.

Health system leaders are thoroughly reviewing existing debt and swap portfolios to determine appropriate levels of interest-rate, tax, put, renewal, market, and counterparty risk exposure.

This level of analysis is not new for larger health systems, but it is now being embraced by systems of all sizes, and the cost and interest rate associated with accessing the capital market-although still important factors in the decision-making process-are no longer the only drivers. Many systems are forgoing the lowest cost of capital in favor of the most stable risk-adjusted solution.

Notwithstanding the healthcare reform environment and associated desire to reduce risk, capital is readily available for health systems of all sizes, and the diversity of options allows them to balance risk, cost, and operating flexibility as they evaluate the most suitable alternatives.

Financing Alternatives

Concomitant with assessing their costs, risks, and resulting capital and financial profile, most health systems approach access to capital by evaluating five types of financing options.

Tax-exempt fixed rate bonds. Publicly issued fixed rate bonds constitute the most popular form of financing for health systems. Given the minimal risk of these bonds, both compared with other financing options and in the current low-interest-rate environment, fixed rate bonds remain a fixture in the municipal market. This form of debt is available to organizations of all ratings and sizes; the borrower need only be willing to pay the costs. The stability of setting specific costs for a determined period and knowing when the interest payments will come due is appealing to both investors and health systems.

The tax-exempt nature of these bonds has caused demand for them to remain strong among both institutional and retail investors. During the past o years, except for a brief time during the financial crisis, access to fixed rate bonds has not been disrupted.

Despite their benefits, fixed rate bonds have limits and disadvantages, including a higher cost of capital, a higher cost of issuance, underwriting fees, investor call protection, and public disclosure requirements. Nonetheless, fixed rate bond issues are still highly preferred and the most common option for capital access. Compared with other financing vehicles, fixed rate bonds are viewed favorably by both rating analysts and investors due to their comparatively lower level of perceived risk and overall market access.

Tax-exempt variable rate bonds. The market for variable rate debt continues to be strong, although market volume has decreased significantly during the past few years. Current market rates make variable rate debt an attractive option for health systems looking for the lowest cost of capital. Variable rate demand bonds (VRDBs), in particular, are appealing because they not only offer a lower cost of capital, but also are more easily refundable.

However, these financing options require more in-depth analysis than is needed with fixed rate bonds because they carry a higher level of risk. Health system leaders should carefully consider the debt profile risks associated with VRDBs, for example, including bank exposure, put risk, remarketing risk, tax risk, and overall market risk. Another concern is that rating agencies are carefully scrutinizing variable rate products and are utilizing new metrics, such as cash to putable debt, to assess the risk and possible portfolio exposure.

These concerns have not deterred many health systems from pursuing these financing options. A number of organizations have determined that they can manage and hedge the risks while taking advantage of the benefits of variable rate debt.

Taxable bonds. Taxable bond issues have gained popularity among not-for-profit healthcare issuers recently. A

number of large taxable issues were sold in 2012, and this trend continued in the first quarter of 20i3.

The increased interest in these bonds is due to various factors, perhaps the strongest being the lack of restriction on the use of proceeds. Compared with tax-exempt bond issues, which have a number of limitations and restrictions, taxable bond proceeds may be used for any corporate purpose. Health systems therefore are free to use the funds for any number of different strategic initiatives, including the purchase of assets that do not qualify for tax exemption, such as facilities used by privately employed physicians and their employees, and the financing of short-lived assets, such as IT.

Moreover, because taxable bonds are not issued through a conduit authority, they often require fewer approvals and ongoing fees. Current market conditions also are favorable due to tight spreads between taxable and tax- exempt rates.

Health systems should consider a number of factors when weighing the benefits of taxable bonds. They are public offerings, requiring full offering documentation and ongoing public disclosure to investors. Investor presentations and meetings are typically required to market these bonds and ensure that potential buyers are fully educated on the health system.

An important concern is that taxable bond issues are typically issued in minimum sizes of $250 million, which makes them index eligible-i.e., eligible to be included in the Barclays Capital U.S. Long Credit Index, the standard benchmark index for managers of long-duration taxable portfolios. Issues that are below this threshold may incur an additional pricing penalty to remain appealing to investors.

Taxable bonds are either not callable or have only make-whole call provisions, meaning the borrower mast pay a lump sum derived from a formula based on the net present value of future interest payments that will not be paid because of the call. Therefore, to refund the bonds, the borrower must pay the investors the anticipated interest through maturity. This requirement makes the bonds, in effect, economically noncallable-an aspect that should be given serious consideration because it could impact future flexibility.

Direct purchases. Also referred to as bank-bought bonds or direct lending, direct purchases have become among the most popular ways for health systems to access capital. Due to inconsistent reporting, exact numbers for the total volume of direct-purchase transactions in 2012 are not available. However, it is safe to assume, based on the level of market activity, that this type of activity constituted 25 to 3o percent of healthcare financing volume. Direct purchases can be structured at either fixed or variable rates, and can be either taxable or taxexempt, depending on the use of the proceeds. A direct-purchase agreement is arranged directly between a bank and the borrower and, therefore, does not require any public disclosure or ratings, which streamlines the timing and overall cost of the financing.

Direct-purchase agreements are also structured for terms of three to 10 years, providing better protection against put risk than is offered by other variable rate products. There is a renewal risk once the term expires, but the long lead time allows for manageable planning. Renewal dates also can be staggered, further mitigating renewal risk with multiple series. Moreover, direct purchases reduce an organization’s exposure to credit risk. Unlike letters of credit (LOCs) and standby bond purchase agreements (SBPAs), direct purchases are not affected by a bank’s rating, and the bonds will remain outstanding until the expiration of the term of purchase.

The pricing for direct purchases is based on a credit spread, so lower-rated organizations will pay more for these agreements. However, direct purchases are available to organizations across the rating spectrum. This type of financing differs from a typical public deal in that there often will be multiple banks offering terms, making it possible to negotiate pricing before entering into an agreement. In normal circumstances, organizations with existing banking relationships through either treasury functions or credit will find that their banking partners are motivated to maintain these relationships and will work hard to provide attractive pricing. Health systems should undertake a request-for-proposal (RFP) process, either formal or informal, to ensure competitive pricing and terms before selecting one or more banks.

Health systems should be aware of a number of potential pitfalls when considering direct purchases. As mentioned previously, the pricing for a direct purchase is based on the health system’s credit, and pricing

escalators are often built into the agreement, resulting in stepped-up rates if the health system is downgraded. Direct purchases also may require additional covenants and reporting requirements, which senior leaders should review carefully to assess the impact on the health system’s debt and capital profile and vet within the document before executing an agreement. These elements include early termination provisions, additional bond tests, limitations on strategic initiatives, provisions for bank access, events of default, and acceleration provisions. Some banks also may expect additional ancillary business as a part of the agreement. Many of these concerns are manageable and can be favorably negotiated, but it is important to address them before the bank or banks give final credit approval.

New financing products. A number of new products are being introduced gradually to the market. Some attempt to address the issues related to the implementation of Basel III. Part of the Basel III accord requires banks to hold reserves that offset their contingent liabilities, such as LOCs and SBPAs. As banks build their reserves, their costs will go up, which could result in higher fees for borrowers. Although these conditions have recently been loosened somewhat, banks remain focused on these potential requirements and are formulating new products that provide flexibility to avoid future higher fees. Other products focus on mitigating put, remarketing, or renewal risks.

One such product, publicly offered floating rate notes (FRNs), has been successfully implemented during the past several years and is regaining popularity in the market. FRNs are a variable rate product that is typically indexed to either a percentage of the London Interbank Offered Rate (LIBOR) index or the Securities Industry and Financial Markets Association (SIFMA) index plus an additional credit spread. The coupons on these variable rate bonds reset quarterly. One benefit of FRNs is that they are not supported by a bank liquidity facility and therefore do not expose the borrower to bank or liquidity. However, FRNS do require public disclosure and typically have a put date that exposes the borrower to renewal risk.

It is likely that these new products will continue to emerge and that not-for-profit healthcare systems will continue to benefit from them as these organizations and their advisers consider new ways to access the capital markets. The new financing alternatives will likely take some time to achieve a large market presence and significant volume, however, as they are typically initially targeted to higher-rated organizations to build up their appeal to investors. In effect, this approach has created an “invisible rating floor,” whereby organizations at a lower rating level are prevented from accessing the new products to maintain the products’ appeal for those investors that currently hold the paper.

Rating Agency Concerns

Managing rating analyst concerns and determining potential “hot buttons” continue to be important parts of the decision-making process for health system leaders who are analyzing financing alternatives. Rating agencies are becoming increasingly conservative in their reviews of health systems. They are placing greater emphasis on the overall stability of a health system’s profile and on the extent to which different types of debt and mixes of products are exposing the health system to potential market pressures.

In addition to the typical reviews of financial performance, market position, management initiatives, patient volume, and physician partnerships, recent rating agency commentary on the industry mentions capital profile and debt mix as integral parts of the rating process. Rating analysts are cautious not to recommend any specific structures or debt mix, as their role in the market is not to provide guidance to borrowers. However, they analyze and report on the risk profiles of health systems compared with those of their peers, and they often identify outliers and underscore them as credit concerns where appropriate. In general, the rating agencies continue to have concerns about the market and maintain a negative view on the healthcare industry.

Key Features of a Successful Strategy

Given the nation’s challenging economic environment, 2012 provided evidence of the resiliency of the not-for-profit healthcare industry as the sector continued to enjoy access to the capital markets. However, not-for-profit health systems will continue to face the headwinds of an ongoing weak economy, declining inpatient volumes, increased competition, and the uncertainties surrounding healthcare reform. Because of these pressures, systems should prepare to move quickly to take advantage of strategic opportunities while carefully assessing the risks associated

with these opportunities.

Fortunately, capital remains accessible for health systems at most rating levels. Allowing leadership teams to choose products that best meet their organizations’ financing and strategic needs to invest in their facilities and remain competitive. Determining the level of risk to which an organization should be exposed in its capital profile and managing and balancing that risk with the organization’s capital and strategic needs are considerations that will continue to challenge leadership teams. Risk assessment models and evaluation methods can be important tools for healthcare borrowers and their advisers to make the most informed and educated decisions.

The future of the capital markets under healthcare reform is hard to predict, but controlling costs with a balanced capital profile and developing the ability to proactively pursue partnerships and market opportunities, all while maintaining flexibility, clearly appear to be optimal strategies.