A heuristic model for the cost of capital of healthcare facilities: estimates for five countries

Abstract

Background The healthcare industry has seen increasing demand, making it an attractive sector for long-term investment. Investors typically assess feasibility through an investment evaluation process that includes calculating the cost of capital and net present value. However, existing research has primarily focused on cost of capital methodologies for large corporations, often overlooking small and medium-sized enterprises. This study aimed to address that gap by proposing a simplified model to estimate the cost of capital for healthcare facilities, with particular emphasis on smaller organizations. The model incorporated key explanatory variables, including investment magnitude, organizational size, administrative expertise, and the geographical region of investment. To illustrate its applicability, we provided estimates for Chile, Germany, Spain, the United Kingdom, and the United States of America.

Methods We reviewed existing research on techniques for estimating capital costs for healthcare facilities. Building on these foundations, we developed an approach that is straightforward, adaptable, and based on publicly accessible data. Our method segmented the cost of capital into two components: (i) risks associated with the country and sector in which the investment is made, and (ii) supplementary risks arising from the investment’s scale, age, or stage of development.

Results We provided a detailed explanation of the proposed method and presented numerical estimates of the cost of capital for healthcare facilities of various sizes across several countries. The final quantitative assessments of the cost of capital ranged from 14.6% and higher, depending on the specific attributes of the investments.

Conclusion This study introduced a novel, straightforward, and user-friendly method for estimating capital costs in the healthcare sector. The model accounted for various factors influencing investment risk, including investment size, the experience level of the management team, and the country of investment. In summary, the approach supports the estimation of the cost of capital for healthcare facility investments and can be used by policymakers and healthcare leaders to make informed decisions on new investments.