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Health Care Industry

Critical access hospitals enter a new era of capital finance: one day this month, with the grand opening of Rio Grande Hospital in Del Norte, Colo., the healthcare industry will have cause to celebrate the completion of the first critical access hospital financed with bonds enhanced by HUD FHA-242 mortgage insurance

Healthcare Financial Management, August, 2004 by Kevin T. Ponton

This event will also mark the beginning of an era of hospital capital finance equivalent to the inauguration of the Hill-Burton hospital construction program in the mid-20th century.

With some luck, local media coverage of the ceremony will be picked up by a national news service and propelled into the business pages of the money-center cities major newspapers. Whatever the coverage, however, it could be strongly argued that any retrospective analysis of hospital development in the United States from here on out would be incomplete without a chapter acknowledging this grand opening.

It's Not Easy Being Small

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Hospitals like Rio Grande, Shoshone Medical Center in Idaho, and Drumright Hospital in Oklahoma pass under the radar screens that identify prospective clients for the largest and most experienced investment bankers. You won't find them in the databases of the national credit rating agencies, letter-of-credit, providers, and bond insurance firms. They have the dubious distinction of being among the "great unwashed" of the hospital credit world by virtue of their size. Let's face it: these organizations are not just small--they're tiny. Rio Grande has just fourteen beds (no, not forty--fourteen). Such hospitals, if "hospitals" is even the right word, don't begin to compare with the medical facilities in cities like Chicago. New York, and Los Angeles.

But be assured these hospitals are important to organizations like HFMA, the American Hospital Association, and JCAHO. Regardless of whose numbers you use, hospitals with fewer than 50 beds constitute more than half of the nation's hospitals. Raise the bar to, say, 80 beds or fewer, and you are talking about 7 out of 10 hospitals.

As a group, the common credit concern of small rural hospitals is simple: it's virtually nonexistent. In fact, if any of these facilities were to call one of the big portals of capital access (money-center banks, rating agencies, bond insurers, or portfolio managers for hospital bond funds), the conversation would unquestionably have been brief and disappointing: "You're too small--and because size is indirectly proportional to risk. small is too risky for us. Have you talked to your local bank?"

Not a Pot of Gold at the End of the Rainbow

The "new era of capital finance" in the title of this article should not be construed as referring to the discovery of a vast new source of dollars for rural hospitals. Rather, this "new era" will emerge as several key elements--each of which has been around for a while--come together to give small rural hospitals an opportunity they never had before:

* The CAH designation

* Cost based payment for Medicare services

* The FHA-24,2 hospital mortgage guarantee pro gram, administered jointly by HUD and HHS

* Acknowledgement that small rural hospitals are a different species of medical facility from urban medical centers

* A rural hospital management environment characterized by rigorous strategic planning like that practiced at the most successful large U.S. hospitals

* The same public finance bond market that has bought, sold, and traded hospital debt obligations for half a century

* Credit ratings in the AA to AAA categories

The combining of the first five elements reflects a change in attitude and policy at the federal and local levels that--if it's not pure chance--could be characterized as inspired genius. The credit for this change ultimately must go to the managers of the mortgage guarantee program in Washington, D.C., administrators in small hospitals with the courage and determination to take steps to change their fortunes, and consultants who are encouraging the development of cutting edge, long-term strategic planning and management.

Not all small rural hospitals can obtain designation as CAHs, but those that do meet the criteria obtain a virtual franchise as facilities that are indispensable to their service areas. The services these hospitals provide are what classic economies calls a public good.

Not all rural hospitals should want CAH designation, either; it can mean downsizing and service changes that some communities and facilities simply won't tolerate. But facilities that obtain CAH designation gain a powerful financial reward: good old-fashioned cost-based payment for Medicare services. This high-test grade of revenue can turn red bottom lines to black, turning former financial losers into profitable facilities.

FHA-242 program administrators had the vision to recognize that CAHs, with their service area "franchise" and cost-based payment powered financial forecasts, create a pool of attractive candidates that could help the FHA-242 program fix one of its own financial concerns: how to diversify its portfolio geographically outside of New York and New England. They streamlined the length of the application process for CAHs by an order of magnitude, from years to months.

Simultaneously fixing a local financial problem and a federal financial problem--what a concept! Charles C. Ervin, Jr., managing director of the rural hospital program for Columbus, Ohio-based Red Capital Group, financed the Rio Grande Hospital project as a banker with PNC Capital, and will host the opening ceremony this month. He says, "Access to the FHA-242 program is the best thing to happen to rural hospitals since Hill-Burton."

Health Care Industry

Healthcare Financial Management, August, 2004 by Kevin T. Ponton

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