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Funding for the Little Guys

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Many critical-access hospitals mistakenly believe their only funding options for replacing outdated facilities lie in jumping through the many hoops and enduring the inevitable delays associated with government programs supported by the U.S. Department of Agriculture or the Department of Housing and Urban Development. Robert Winkler begs to differ. Doctors Memorial Hospital in Bonifay, Fla., where Winkler is the chief executive officer, will break ground this month on a 20-bed, $17 million replacement hospital about 1.5 miles away from its current 25-bed facility. Winkler and his board looked at both USDA and Federal Housing Administration funding options early on and thought one of those two options would be the answer, he says. "But we did a ton of investigating and it was just a mixed bag." For Doctors Memorial, the USDA option, which loans money at very favorable rates coupled with a long repayment period, looked attractive at first, but "there was just no certainty," he says. "We knew that many government programs get approved and never funded." HUD 242 was an option, he adds, but "the paperwork was crazy." Unlike many hospitals whose financial straits are dire, Doctors Memorial was able to access the public markets. One factor in the hospital's favor was that in 2002, anticipating the need for a new facility closer to the highway, the board purchased the 10.1 acres on which the new hospital will sit. "It's now worth 10 times what it was," says Winkler. Doctors' Memorial will double in size, despite the five-bed decrease, because the outpatient area will boost its capacity from five bays to 10. Winkler says the hospital had not really considered any option other than government funding, but rates looked so tempting, they felt they had to try. They contacted Arlan Dohrmann, a managing director at investment banker Stern Brothers & Co. in Chicago, who underwrote a bond deal with rates near 5.5 percent. Winkler and his board ultimately went with that deal, reasoning that prior to soliciting bids, they could afford a bond of up to 6 percent. The hospital will start paying on its 30-year loan in January 2008, just a month after the new facility is scheduled to open, Winkler says.Dohrmann says his firm is underwriting several similar deals for other hospitals across the country, because CAHs are reimbursed relatively well. Many represent better risks than their management team may realize, he says. Such deals are meant to meet these hospitals' needs without exceeding debt capacity, as identified in a feasibility study or other professionally designed forecast. Hospitals agree to financial disclosures on a regular ongoing basis, he says, just like bigger hospitals whose debt is rated by the major agencies."Critical-access hospitals are getting good rates right now if they have managed their assets well," Winkler says.-Philip Betbeze