Hospital financing gets easier with HUD's new insurance rule

Extending a federal mortgage insurance program could save strained institutions hundreds of thousands of dollars and restart stalled projects.

By Victoria Stagg Elliott — Posted July 20, 2009

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A regulatory change at the federal level should make capital cheaper and less challenging to secure for the nation's hospitals.

Experts say physicians should benefit, because hospitals will be more able to update technology. Infrastructure projects that have been put aside may be restarted. "Any time we can lower the cost of capital, hospitals can do more," said Tom Green, CEO of Lancaster Pollard. The company advises health care institutions on financial matters.

The Dept. of Housing and Urban Development announced July 1 that Federal Housing Administration Section 242 hospital mortgage insurance will be an option for all hospitals looking to refinance debt. The program previously had been available only to those institutions using at least 20% of the money gained from a refinance for new construction or renovation.

Insuring a loan lowers the interest rate by several percentage points and makes it easier for institutions to access capital at a fixed rather than adjustable rate. At a House Financial Services Committee hearing June 8, a hospital executive, Michael Allen, chief financial officer of Winona Health in Winona, Minn., said inexpensive capital was needed so hospitals could implement electronic health records and other new technology, as well as update aging facilities. He testified on behalf of the Healthcare Financial Management Assn.

"This is a little piece of a bigger problem, but it is important and significant," said Michael Rock, a lobbyist with the American Hospital Assn., which also backed the change. "[Hospitals] will now be able to reduce the interest costs they are paying."

For example, Moab (Utah) Valley Healthcare Inc. signed onto the program May 29 to insure a $29.9 million loan to construct a new hospital. The agency estimates that $9.6 million will be saved over the life of the loan.

"By lowering the cost of credit, FHA will allow Moab Valley Healthcare to use more of its resources to provide quality medical care," said HUD Secretary Shaun Donovan in a statement.

The change to the program was made because, "at a time when the demand for health care services are on the rise, the lack of access to capital has made it difficult for hospitals to obtain financing for facility, equipment and technology needs as well as meet obligations on existing debt," according to the notice.

Fewer financial options

Many financing options for hospitals have become less available or have disappeared. Bond insurance that reduced the cost of these instruments is no longer an option because of significant changes in that industry. Banks are less likely to renew letters of credit. Lenders also may require hospitals to repay debt early because various covenants may have been violated, such as having a certain number of days worth of operating funds on hand.

"The reason [HUD] made the change is really responding to market demands, cost of capital and the availability of other funding structures," Green said. "This is really filling a void."

The industry also has not been spared from the economic downturn. A Moody's Global Corporate Finance report issued in June expressed concern that bad debt from uncompensated care is about to increase significantly and may hurt investor-owned hospitals. According to an AHA report issued April 27, 31% of hospitals experienced a moderate or significant decrease in the ratio of net income to the amount due creditors.

It's unclear how many facilities will take advantage of the altered 242 program. Since the program began in 1968, 370 hospitals have insured more than $14 billion in loans. The agency said it has received more inquiries about this program as private bond financing has dried up.

The agency will publish a rule on the matter, which will be open for public comment for 60 days. The change then will be permanent.

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