Planning for the Future: Hospital Financing Case Studies
It’s no secret that hospitals and health systems have seen their ups and downs over the past five years. In 2015, a positive trend paved the way for higher-rated providers, while 2016 saw the trend reversed as median ratios deteriorated for all rating categories. Currently, hospitals and health systems are tackling an increase of pharmaceutical, supply and labor costs, as well as a challenging payer environment. Many patients are steering towards urgent-care centers, in turn causing some hospitals to see flat volumes and expense growth that outperforms revenue growth.
Regardless of the fluctuating environment, there are financing structures that a hospital can utilize to improve its fiscal outlook and better serve its patients. Below, we present three examples of hospitals planning for the future and completing transactions that will benefit both the hospitals and their communities for years to come.
Persistence Pays Off
Fulton County Health Center (FCHC) is a private, nonprofit independent hospital located in Wauseon, Ohio. It’s a 25-bed general acute care and 10-bed psychiatric critical access hospital (CAH) facility that provides inpatient, outpatient, emergency care and psychiatric services. Beginning in 1973 as a full-service hospital, FCHC grew through the years to include a wide variety of programs and services that greatly benefit the residents of Fulton County.
Management at the hospital sought to build a medical office building (MOB) on its campus to accommodate the growing need for physician office space. The hospital had a strong credit profile, but its existing lender was not in a position to extend further credit. FCHC and its investment bank then considered using the U.S. Department of Agriculture (USDA) Community Facilities (CF) loan program. The parties worked together and determined that rolling all of the hospital’s existing debt into the transaction was the best way to meet the USDA CF program requirements. Although this was a great opportunity for the hospital, it did create several time-consuming challenges.
The main obstacle centered on a ground lease where FCHC leased property from the county. Persistence paid off, however, and the hospital and its investment bank eventually developed a solution that was ideal for all parties involved. The investment bank used its long-term relationship with the hospital, as well as its experience and relationships with USDA, to help guide the project to a successful conclusion.
Despite several road blocks and hurdles throughout the process, the hospital ultimately secured a USDA commitment for a permanent loan that funded the construction of a new 60,000 square foot MOB, replacement of an existing underground storage tank with an above-ground system, and financed miscellaneous capital improvements to better serve Fulton County’s residents.
“We were simply out of space for our doctors,” says Patti Finn, FCHC CEO. “Not only do new specialists want to come here, but some of our current physicians in our North Medical Office Building would like to have more office and exam room space. This new facility will solve both problems and offer our patients more opportunities to see medical specialists right here in town.”
Expansion and Modernization
FCHC wasn’t the only hospital that used the USDA CF program with expansion and renovation goals in mind. A few states away, Humboldt County Memorial Hospital, a 21-bed CAH located in Humboldt, Iowa utilized the CF program and took advantage of low-rate terms that maximized its debt service coverage ratio (DSCR) for the future.
The hospital worked with USDA to secure a 40-year, fixed-rate loan in order to support a massive expansion and renovation initiative. Construction for the new space began in April. Michelle Sleiter, CEO said, “We were seeing significant growth that was outpacing our current space, which led us to moving a little bit faster than we had originally anticipated in regard to a building project such as this.”
Along with supporting the construction of the expansion, the financing structure will also fund the interest payable on the hospital’s loan, as well as pay certain transaction costs and expenses.
Different from the expansion and renovation transactions mentioned above, Putnam County Hospital recently closed a successful $6 million acquisition financing of an 84-bed skilled nursing facility (SNF). Putnam County Hospital is a 25-bed critical access hospital located in Greencastle, Indiana. Management saw the acquisition as an ideal fit for their future strategic growth plans and as a high-return opportunity.
Putnam’s finance company provided the acquisition financing through its subsidiary, while simultaneously underwriting the loan application to the U.S. Department of Housing and Urban Development (HUD). The bridge loan allowed for the timely acquisition of the facility and was structured to allow for an immediate refinance through the HUD 223(f) program. The 223(f) application was submitted within one week of the bridge loan closing, with the goal being to refinance the bridge loan through HUD to provide a permanent financing solution at a low, fixed interest rate. In a rising interest rate environment, the immediate submission of the HUD application reduces exposure to interest rate risk by reducing the time from bridge closing to HUD refinance.
As the hospital and health systems sector continues to evolve, it’s important for management to consider the future when planning their next projects. In an effort to remain competitive, more and more hospitals are planning projects that aim to modernize and expand their facilities. Effective and efficient financing structures are a key aspect of these initiatives, which highly benefit both the hospitals and their communities for years to come.
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