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By James D. Neil
Electra Memorial Hospital is a critical access hospital (CAH) located in Electra, a small town in Northwest Texas. The hospital is owned by the Electra Hospital District and is the only acute healthcare provider within 30 miles.
The hospital was built in 1976. While well maintained, the hospital layout and size were outdated. Regulatory requirements necessitated a much larger laboratory and hospitalwide compliance with the Americans with Disabilities Act. The hospital district also wanted to relocate the rehabilitation department, add a new inpatient wing with private rooms, give the building exterior a facelift, and update electrical, mechanical, and plumbing services.
The total cost of this expansion/renovation, including hard and soft costs, was more than $11 million, a hefty expense for a hospital with about $8 million in revenues.
The challenge was finding a source for these funds at the lowest possible cost and at an affordable level of debt service. The board and management also wanted to preserve as much cash as possible on its balance sheet.
Investors and lenders needed to be convinced that the hospital would have more than enough cash flow, post construction, to service its new debt. It was critical to fully explain the new anticipated revenues from Medicare (CAH partial reimbursement of interest and depreciation costs), new anticipated tax revenue, and new revenue from added services and patients. This was a lot of information to justify and a lot for any investor/bank to take in.
The hospital's investment advisor contemplated a tax-exempt bond issuance to be backed by a bank letter of credit or privately placed directly with a bank. However, issuing the letter of credit was not attractive to regional or national banks because of the tight credit market, coupled with Electra's rural location. Local banks also were not an option due to the loan size. At the same time, the temporary increase for bank-qualified tax-exempt bonds, part of the American Recovery and Reinvestment Act, was set to expire and getting a bond placement closed by year-end 2010 would have been challenging, if not impossible.
The local U.S. Department of Agriculture (USDA) office proposed to Electra a direct loan of stimulus money for the entire project at a very attractive interest rate. Although the USDA application was put together and submitted quickly, the USDA stimulus funding dried up before the application could get through internal processing.
It was during the USDA review that the first steps were taken to apply for alternative funding from the Department Housing and Urban Development (HUD) mortgage insurance through the Federal Housing Administration's Section 242 Program. On Jan. 31, 2011, the hospital financing team met with HUD for the required pre-application meeting. This presentation was the first critical step in the 242 process and the team met the challenge. HUD invited the Electra Hospital District to submit a full application that afternoon.
A lot of work was still ahead. A detailed market feasibility study needed to be prepared by an accounting firm and a fixed-price construction contract had to be negotiated and written. Both documents needed to be approved by HUD.
On Sept. 30, 2011, the Electra Hospital District received a firm commitment from HUD for mortgage insurance. The deal closed Nov. 29, 2011, completing one of HUD's fastest executions in recent years, according to HUD. Once construction is completed Electra Memorial Hospital will double in size.
The terms of the hospital's mortgage are the best part of this success story. The commitment from HUD to insure the mortgage note allowed the hospital's consultant to approach numerous investors to purchase this Government National Mortgage Association instrument, which now carried an AA investment-grade rating. Electra received a 25-year loan with a fixed-interest rate below 5 percent (not including mortgage insurance premium of 0.5 percent annually on the outstanding loan balance), and with no financial covenants to meet. The hospital district would just have to make the payments and fund a debt-service reserve fund over a 10-year period.
This form of financing not only provides the hospital with terms not available elsewhere, but it will also conservatively save the hospital an estimated $5 million in interest expense, compared to other potential financing options.
Because of today's tight credit markets, borrowers are experiencing various reasons to change capital funding routes in mid-financing. This case study shows that pursuing several different options-or multitracking-can help borrowers keep options open in an ever-changing landscape to achieve their funding objective.
James D. Neil is senior vice president, Lancaster Pollard, Austin, Texas, and a member of HFMA's Lone Star Chapter (email@example.com).
Publication Date: Thursday, March 01, 2012
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Scott Elston, strategic accounts manager, GE Healthcare Services, describes how substantial cost reduction in health care requires rethinking business strategy and asset use.
Robert Williams, MD, director, Deloitte Consulting LLP, and Arielle Freiberger, product strategist, ConvergeHEALTH by Deloitte, explain how sophisticated retrospective, real-time, and predictive data analytics can inform decision making to reduce costs and improve care.
Stuart Hanson, director of business development (healthcare solutions) at Citi Retail Services, discusses how improving the payment experience can benefit consumers and healthcare providers.
Scott Schmidt, vice president, Cerner RevWorks, LLC, shares insights on best practices for maximizing a revenue cycle management partnership.
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