Implications of the method of capital cost payment on the weighted average cost of capital.

The author develops a theoretical and mathematical model, based on published financial management literature, to describe the cost of capital structure for health care delivery entities. This model is then used to generate the implications of changing the capital cost reimbursement mechanism from a cost basis to a prospective basis. The implications are that the cost of capital is increased substantially, the use of debt must be restricted, interest rates for borrowed funds will increase, and, initially, firms utilizing debt efficiently under cost-basis reimbursement will be restricted to the generation of funds from equity only under a prospective system.