Let Need Drive Finances for Capital Projects

John Commins, for HealthLeaders Media, November 12, 2008

Community and rural hospitals considering renovations on their aging buildings or altogether new construction should not be discouraged by the down market and the credit crunch, says Bill Wilson with Lancaster Pollard.

"There are still plenty of opportunities out there. We are at an up-tick in seeing hospitals looking at renovations," says Wilson, an analyst for the Columbus, OH-based investment and mortgage bank that provides financial services for smaller rural hospitals.

Let need drive finances, Wilson says, not the other way around.

"Hospitals with good business plans, whether it's replacement or renovation, are still getting financing for those projects despite what is happening in the market," Wilson says. "It involves plenty of work with the federal programs, but there is still plenty of capital for projects with solid operating and strategic plans."

That's good news for the hundreds of decades-old Hill-Burton-era hospitals across the United States, many built in the 1950s and designed for an obsolete inpatient model of healthcare delivery and which need to be replaced or undergo significant renovations.

Wilson says LP studies of rural hospital renovation and construction projects around the nation have found that it can be money well spent. "The good news for the community is not only do you increase healthcare utilization, but operating margins stay decent and cash-on-hand seems to be staying at manageable levels," he says. "The message is that hospitals aren't putting themselves at undue financial risk, which is a good thing, considering what is happening in the overall economy."

With the down economy, community and rural hospitals will face greater difficulty finding supplemental financing through the traditional routes of local tax hikes and philanthropy. However, Wilson says financing opportunities exist because of the FHA's Section 242 Mortgage Insurance program, which provides guarantees on up to 100% of hospital debt, and which could prime the credit pumps. Tax-exempt bonds are also an option, and Wilson says the processing time has been reduced. New Federal Home Loan Bank legislation also means that bank letters of credit are available, as are bank-qualified loans for projects costing $10 million or less, he says.

Wilson says rural and urban hospitals are facing different financial strains—and opportunities. "What we are seeing in the nonurban areas kind of flies in the face of what is going on in the metropolitan areas," he says. "In some of the metropolitan areas, you have hospitals that are seriously facing closing and trying to figure out strategically what are the best business lines. In the rural areas they can't close. They are too necessary to the community, and they've still got very basic business opportunities that they can pursue."

Wilson says many rural hospitals are still "woefully out of date" in outpatient services like radiology, therapy services, and pharmacies.

For hospitals planning to renovate or rebuild, Wilson offers some advice.

First, use a team approach. Ideally, you'll want an investment banker, an architect, and a marketing assessment firm on board. "Your market assessment is going to tell you what your service lines are going to be," he says. "The architect should give you an idea of the physical capabilities of your existing building and what your needs are, and compare that with your options for a replacement facility. Your auditors, working with an investment bank, are going to determine if your project fits within the debt capacity."

Next, take the time to plan correctly, rather than rushing a project to save money. If you're planning a renovation, no matter how minor, plan for every contingency. "We found that there are a lot of unexpecteds that come into play in renovation projects," Wilson says. "Hospitals doing a replacement project have very elaborate plans for transferring patients and operations over. Hospitals doing substantial renovations should do the exact same detailed planning process to keep from having unexpected surprises."

Besides, having a solid business plan in hand always looks good when you're looking for financing.

John Commins is the human resources and community and rural hospitals editor with HealthLeaders Media. He can be reached at jcommins@healthleadersmedia.com.
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