Little Known ARRA Provision Can Help Finance Health IT

It is an understatement to say that many hospitals, health systems, and physicians could use a helping hand when it comes to purchasing, implementing, and becoming meaningful users of certified electronic health record products. One of the biggest hurdles is finding the money to purchase health IT, because providers won't receive their share of the government incentive payments outlined in the American Recovery and Reinvestment Act of 2009 until after the technology is in place, and they are deemed meaningful users of the technology.

But a little known provision in ARRA, known as the Bank-Qualified Rule, may help solve that challenge for some nonprofit healthcare providers. I recently spoke with Randy Waring, managing director at GE Healthcare Financial Services, about how this provision can help organizations purchase health IT.

HealthLeaders Media: What is the Bank Qualified Rule?
Waring: The Bank-Qualified Rule is a small provision of ARRA that was designed to increase the amount of tax-exempt investments in the municipal and nonprofit markets. Banks have always been able to invest in tax-exempt transactions but they were limited to transactions where the issuer of the bonds didn't issue more than $10 million during the calendar year. Those were the old rules, and they have been in effect for decades. What they did in the beginning of last year to stimulate more tax- exempt financing by banks was they expanded that rule. Instead of a $10 million limit for an issuer, they changed it so it is now a $30 million limit at the borrower level.

HLM: How does this impact nonprofit healthcare providers?
Waring: When a nonprofit hospital does tax-exempt financing, the bonds are issued through a state- issuing authority on behalf of the hospital. Under the old bank qualifying rules, if the state-issuing authority issued more than $10 million during the calendar year, those bonds were nonbank qualified. Because of that, the vast majority of nonprofit hospital bonds were not bank qualified—well over 90%. Under the new rules, it is bank qualified up to $30 million per borrower, so if the hospital—not state issuing authority—is not issuing more than $30 million per calendar year then it is bank qualified. Hospitals are going to benefit because there are banks that are going to lend them tax-exempt money that otherwise would not have. A lot of hospitals haven't woken up to the fact that this new rule is out there and it is making it more attractive for banks to lend to them.

HLM: What are some of the other benefits of this type of loan?
Waring: These are private placement tax-exempt financings. You don't have an investment banker involved or a credit enhancer like a bond insurer or bank letter of credit, or a rating agency involved. It is just a simple loan that is done between the hospital and the bank, but issued through this conduit agency. It is far simpler than the typical tax-exempt bond transaction that hospitals are familiar with. It is a lot faster; you can get the deal done in 30 to 60 days instead of six months or longer as is common with a public deal. You don't have the high transactions costs and legal expenses that are associated with a public deal, and because these are mostly bank-qualified now, you can get interest rates that are very competitive with what you get in the public market. It is a good alternative for the small hospitals that would not have ready access to the public market.

HLM: Is it a good option for financing health information technology?
Waring: It is perfect for health information technology or equipment purchases, because it doesn't make sense for a small or short-term transaction to incur all of the upfront costs of doing a big public deal. Leasing is a difficult financing option for an EHR because you have so much software and soft costs. If you are looking for ways to finance an EHR project or a revenue cycle system or any kind of IT project and you are in the nonprofit market, private placement tax-exempt financing is a perfect solution.

HLM: What do hospitals need to know about accessing this type of financing?
Waring: Hospitals ought to be talking to banks and other lenders to see if private placement tax-exempt financing is a good alternative to paying in cash or going to the public bond market. They should reach out to banks or other lenders that they work with and just ask them about this—how it works and what kind of interest rate they can get. Right now these rules are only in effect for 2010 so we have just 12 more months, and then, supposedly, the tax rules will roll back to what they were before. There may be a window of opportunity that will close at the end of this year.