An HFMA Healthcare Financial Pulse Resource

With uncertainty surrounding healthcare reform and the capital markets as well as the weak economic outlook, hospitals might want to play it safe and postpone capital-intensive projects until economic times improve. But, depending on how far into the future hospitals push their capital projects, this could be a risky strategy.

1. Cost-effectiveness

As time goes on, it undoubtedly will be more expensive for hospitals to complete their projects. "Interest rates are going to go up, so it will be more expensive to borrow," says Tanya Hahn, CPA, MBA, senior vice president, Lancaster Pollard & Co., Columbus, Ohio. "Construction dollar costs also can go up, and hospitals can lose market share if someone else in their geographic market goes ahead with a similar project."

In some ways, 2010 actually is turning out to be a good time for hospitals to move ahead with capital projects. "It is cheaper to borrow today than it was a year ago. It is cheaper than we anticipate it will be a year or 18 months from now," Hahn says.

2. Time-sensitivity

The next 10 months also offer a window of opportunity, as financing options that became available in just the past two years are slated to expire on or before December 31. Lancaster Pollard describes these and other hospital financing options for 2010 in the white paper Financing Options for Large Hospitals and Multi-Hospital Systems.

Among these time-sensitive financing alternatives is a combination of local bank financing and Federal Home Loan Bank (FHLB) credit support. Until the beginning of 2011, hospitals can supplant the loss of lines of credit from large regional banks with syndicated deals involving one or more small local banks that are willing to compete for the business.

To take advantage of this alternative, a hospital or health system must be seeking financing for a manageable size project-generally $20 million or less-from a small number of banks. "You can't have 10 little banks at the table trying to syndicate a deal. But if you have anywhere from one to four or five banks, it works," Hahn says.

Hopedale Medical Complex, a 25-bed Critical Access Hospital near Peoria, Illinois, issued variable-rate tax-exempt bonds that were enhanced by a local bank and supported by a FHLB letter of credit. Although the cost of the bond issue was $50,000 more than a direct loan from a bank would have been, it saved the hospital $105,000 over 15 months by securing a low interest rate.

Another financing possibility, particularly for public hospitals, is to issue taxable Build American Bonds (BABs). BABs were created by the U.S. Congress in 2009 when the financial capital market crisis made it nearly impossible for municipal bond issuers to finance projects at reasonable rates. BABs were created for government-owned hospitals and other public entities as part of the 2009 American Recovery and Reinvestment Act (ARRA).

BABs allow hospital borrowers to finance capital expenditures for new construction or acquisitions and receive a direct periodic cash subsidy from the federal government that is equal to 35 percent of the interest coupon cost on the eligible BAB debt, or the investors can obtain a 35 percent tax credit after buying BABs. Most of the transactions done to date are the direct payment BABs, so it is the borrower that benefits from the subsidy. The ability to issue BABs is currently set to expire Dec. 31, 2010. President Obama's fiscal 2011 budget proposes opening up BABs to nonprofits in 2011, but decreasing the subsidy to 28 percent.

Also expiring December 31 is the ability to issue bank qualified debt under Section 265 of the IRS code in an amount up to $30 million per borrower.  The limit was previously $10 million per issuer per calendar year. The increase means that more debt can be issued and purchased by banks across the country that may otherwise not be able to lend due to lower ratings on their letters of credit or lack of an investment-grade rating. After 2010, the limit will revert to $10 million.

ARRA also authorized the U.S. Department of Agriculture to award more grants and loans for building and improving hospitals in low-income rural areas through the end of this fiscal year, or Sept. 30, 2010.

3. Readiness

The lending environment is easing. Although hospitals have fewer financing options now than they did two years ago, capital is nonetheless available. "There is still a big appetite for tax-exempt debt from the investment community. So if a hospital has the right strategy and can afford to pay for a project, there is no reason to hold off," Hahn says.

Publication Date: Friday, February 12, 2010