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Even in Today's Economy, Creative Solutions Get Hospital Projects Built

By J. Todd Robinson, AIA, and Alan P. Richman, for HealthLeaders Media  
   April 30, 2010

It's possible, even in today's economic climate, for new hospital construction projects to get off the ground. Collaboration and commitment are enabling hospitals of all sizes to be built in a down economy. Old playbooks don't have to be entirely discarded, but they must be revised and adjusted to accommodate a reconfigured playing field.

Notwithstanding hospital sizes, healthcare facilities usually share commonalities. As is the case with most, community hospitals have limited cash to spend and often, marginal operating revenue. Patient census may be challenged as local residents bypass the existing facility to seek care in neighboring communities with newer facilities.

To competitively position these community providers, cost-effective solutions must be created for the construction and operation of new facilities that offer them long-term viability with no sacrifice to their building and clinical programs. Flexible operational efficiencies that eliminate duplications and allow them to better care for patients with tightened staffs should be integral in the design.

Planning and team selection
Once a community hospital makes the decision to improve its physical plant, the key for bringing this vision to reality is having an experienced team. Selection of these parties should be based upon track records with similar projects, experience with FHA-insured financing projects and previous demonstration of open communication within the team framework. Experienced team members can offer cost-effective solutions and creative ideas, as well as keep the process moving through the ever-complicated maze of accessing financing and executing project development.

No matter the project, team selection is more critical than ever before. To lead the process, two tracks must be navigated: project development and financial planning, and loan funding. Master planning and debt capacity analytics are essential to managing the hospital's finite time and dollars. The early selection of an FHA mortgage banker/financial advisor and architect who understand the financial limitations of small hospitals can best assure that a hospital's project expectations match the realities of its financial wherewithal. During the planning process, as the project scope and budget take shape, additional team members are required, such as the owner's representative, construction manager, feasibility consultant and legal counsel.

Working together as team, the planning process most certainly will culminate in the commencement of the project design and financing stage. As the project's affordability becomes more apparent, goodwill delivered by enhanced community buy-in further bolsters fundraising and the dynamics of local politics.

While availability of funding sources is not what it once was, there is still hope for community hospitals needing to build a new facility. A funding vehicle that can be utilized is the FHA Section 242 insured mortgage loan from the U.S. Department of Housing and Urban Development. The reduced FHA 242 borrowing rates increase hospital debt capacity and can turn unaffordable projects into financially viable ones.

If they meet HUD eligibility requirements, community hospitals can apply for FHA 242 mortgage insurance, which dramatically lowers borrowing rates by bolstering the creditworthiness of hospital loans with a federal government guarantee. While challenging to obtain, FHA 242 mortgage insurance is often the only cost-effective financing option for a community hospital seeking funds to replace its old facility. The FHA 242 application and loan approval maze is daunting and with no upfront assurances of success, many hospitals put hundreds of thousands, if not millions, on the line prior to receiving a HUD commitment required for loan closing.

This level of at-risk hospital spending can be allayed somewhat, if the mortgage banker can benchmark hospital spending to the achievement of certain milestone in the HUD process. The coordination of project work within the HUD process is achieved through the collaboration of the architect and the project manager, within the financing budget and Sources and Uses Statement generated by the mortgage banker. In HUD terms, this budget is called the 2013.

Efficiencies in the FHA loan process, such as, expediting the start of feasibility work, dual-tracking project planning and design, dealing with possible legal and political matters and assessing the viability of various funding options can shave two or more months from the standard HUD underwriting schedule of eight to 10 months.

The technicalities of the FHA loan process and the peculiarities of each hospital applicant make integration between the project and financing team essential. To streamline the process and avoid delaying the project, the team must assign individual responsibilities that work lockstep in conjunction with the other team members. This assures a better distribution of heavy lifting and eliminates task duplication. Hospital management involvement and board representation throughout can advance decision making and keep the process moving.

Our case studies below explore two very different FHA 242 financed hospital projects. The Memorial Hospital, a landlocked, 1950s critical access facility in the mountains of northwest Colorado, after six years of stalled efforts, achieved its goal of a new facility in 2009. Meadows Regional Medical Center, a small but well-utilized community-based, acute-care hospital in rural Georgia, raced to complete, within one year, the planning and FHA 242 financing of its new hospital this past summer.

Critical Access Hospital
This project illustrated the importance of patience. The Memorial Hospital originally went public with its plans for a new critical access hospital to the citizens of Craig, CO, in 2002. TMH, at the time, however, lacked the operating revenue to afford the project they were contemplating, and they didn't have the debt capacity. They pressed on and selected a team, but, unfortunately, they were unsuccessful in their efforts. Undaunted, TMH made two critical mid-course adjustments that would set in motion successful FHA 242 financing and the November 2009 opening of the new hospital on the campus of a nearby community college. The steps TMH took included, with the assistance of its management company, the replacement of its prior project team with FHA-experienced firms to serve as the owner's representative, architect and construction manager.

The proposed project site was in an undeveloped greenfield, 7,000 feet above sea level in an environment that experienced prolonged winter seasons. These factors presented their own distinct challenges for the project design, which also had to comply with HUD regulations.

While TMH knew it was essential they replace their almost 60-year old facility, George Rohrich, the hospital's CEO since 2006, says the tide turned in favor of achieving their goal when a tax ballot was presented to voters and passed in 2007, which provides $1.5 million annual support for TMH. This level of municipal support from a small community of roughly 10,000 was also bolstered by the TMH foundation's successful capital campaign, which raised an additional $1.2 million. "These two actions helped make the project feasible and demonstrated community support for HUD funding", says Rohrich. The Colorado hospital obtained a 25-year construction/permanent $40.3 million FHA 242 low-cost loan.

"Once the loan was in place, with everyone working toward a common goal, we were able to complete our hospital eight weeks ahead of schedule and $2 million below budget," he says. "We were able to put this saved money back into the project to include enhancements for patient care."

Located on the western slope of the Rocky Mountains, the stone and brick hospital is sited on a vantage point overlooking the town. The new hospital offers patient privacy, security and technological advancements, all of which were not available in its predecessor. The mountainous setting inspired the lodge-like design that includes a two-story lobby with a gas fireplace, natural lighting through clerestory windows, wood and stone detailing. Expanded surgical service, enlarged and operationally efficient emergency department and birthing center enable the hospital to better serve its community. It is now positioned to turn around patient out-migration to neighboring healthcare facilities and also benefit the hospital's recruitment efforts.

"Our overall market share, based on our 10 largest service lines, had been decreasing over the last 10 years, stabilizing at 50 percent in 2007," says Rohrich. "Although it's still too early to document a change in utilization, we have no doubt that we will see a progressive increase in market share. And, as for physician recruitment, even during the design stage, the new hospital was a deciding factor for bringing in two new general surgeons, two family medicine physicians and two OB/GYNs."

Acute Care Hospital
Meadows Regional Medical Center in Vidalia, GA, is a case in contrast. Over the past nine years, MRMC began outgrowing its current 66-bed acute-care facility mostly through an increase in outpatient traffic exceeding 400 percent. To evaluate their options to accommodate the increased patient load, the hospital CEO initiated both internal and external debt capacity and master facility analyses. Once their debt capacity was ascertained and a replacement hospital was deemed more viable than an onsite expansion, Meadows knew which direction to go.

"At Meadows, we began with a strong commitment that quality was more important than speed, and that all stakeholders had the right and need to be heard and involved to produce the best result," says Alan Kent, president and CEO. "Our early focus began with the assembly of a strong internal team that represented multiple facets of the organization including the clinical, operational and financial disciplines." Also included were representations from the Board, medical staff, management and non-management levels. Our team was authorized and empowered to make the decisions regarding competitive selection of the project management firm, architectural firm, construction management firm and financing company.

"The key element for success is in the choice of team members," says Kent. "Feedback from our architects, construction manager, subcontractors and users helped us evaluate alternatives quickly and rule out those that created budgetary problems. They also gave us flexibility to examine different approaches to certain problems to achieve a strong plan that all parties could ultimately endorse."

Meadows became the first hospital in Georgia to receive an FHA Section 242 insured loan, totaling $84.76 million, ensuring that the 194,000-square-foot, two-story replacement hospital would become a reality. It is scheduled for completion toward the end of this year.

Operational efficiencies, departmental relationships and flexibility for future expansion were drivers to the design of this facility as well as the creation of an identity and presence for the healthcare provider that will now be visibly sited on a state highway.

Though very different types of hospitals, TMH and MRMC represent successes in their own markets. They obtained financing, completed timelines on or ahead of schedule, and identified cost-effective design solutions that responded to each owner's vision.

J. Todd Robinson, AIA, is principal of architectural firm Earl Swensson Associates Inc., and Alan P. Richman is president and CEO of InnoVative Capital, LLC, a HUD-licensed FHA mortgage bank specializing in financing FHA 242 mortgage insured hospital loans. They may be reached at and, respectively.
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