AHA cautions HUD against tightening hospital financing program

While federal mortgage insurance is no longer restricted to new hospital construction or renovation, eligibility standards have been raised.

By Victoria Stagg Elliott — Posted Aug. 19, 2009

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The Dept. of Housing and Urban Development should not up the financial standards that health care institutions need to qualify for Federal Housing Administration Section 242 hospital mortgage insurance, according to a letter issued July 27 by the American Hospital Assn. and co-signed by members of a coalition of national health care associations.

"It's a bit backwards. This makes it very difficult for hospitals to avail themselves of the program at the very time when they really need it to lower borrowing costs," said Susan Waltman, executive vice president and general counsel of the Greater New York Hospital Assn. The organization is a member of the coalition.

HUD announced July 1 that the Section 242 program will be an option for all hospitals looking to refinance debt. The program previously was available only to those institutions using at least 20% of the money gained from a refinance for new construction or renovation. The change was cheered by those in the industry.

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.

Concern is being expressed, however, about changes to the financial standards also in the document that will be used until a final rule is issued. These include raising the qualifying operating margin over the past three years from zero to 0.33% and the debt service coverage ratio from 1.8 to 1.25. Advocates argue that standards for established facilities should not be higher than those under construction or being renovated.

These standards "in effect raise baseline thresholds above those currently used for underwriting inherently riskier (from a real estate perspective) new construction projects, since those projects are subject to unknown construction escalations and delays and market uncertainty," Rick Pollack, AHA executive vice president, wrote in the coalition's letter.

A HUD spokesman said the letter had been received and was being reviewed.

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