Healthcare Business News

Tax credit extension sought to aid rural providers

By Beth Kutscher
Posted: April 14, 2014 - 12:45 pm ET

Advocates are trying to persuade Congress to permanently extend a tax incentive program that helps small and rural healthcare providers obtain financing for building and expansion projects.

The New Markets Tax Credit Program (PDF) was authorized in 2000 and last extended for two years on Jan. 1, 2013. The current push is to make the program permanent, which President Barack Obama supported in his fiscal 2015 budget proposal. In the House, Reps. Jim Gerlach (R-Pa.) and Richard Neal (D-Mass.) reintroduced legislation earlier this month (PDF) that would make the program permanent rather than requiring reauthorization every two years. Similar bipartisan legislation was introduced in the Senate last summer.

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Cuyuna Range Hospital District in Crosby, Minn., is among the rural providers that have taken advantage of the program. The district, which operates 25-bed Cuyuna Regional Medical Center, wanted to finance a $15.7 million project last year to expand its operating rooms and surgical clinics. The program allowed Cuyuna to save 18% on its borrowing costs, or about $2.3 million.

“It's a real opportunity for rural healthcare for expansion,” said John Solheim, Cuyuna Regional's CEO. “It helps you create equity and economic development.”

While the program is broadly aimed at spurring investment in economically distressed communities, in 2012 about 19% of the businesses financed through the program were healthcare-related (PDF), up from 12% the previous year, according to a survey from the New Markets Tax Credit Coalition, an advocacy group. The 48 healthcare-related projects in 2012 received $637.9 million in financing. Only educational and community facilities received more financing under the program.

For healthcare providers, the program allows them to reap savings through a lower interest rate from lenders and makes them more attractive borrowers at a time when many rural hospitals are struggling to obtain financing.

“Often rural communities are a one-horse town,” said Charlie Spies, CEO of CEI Capital Management, which has been solely focused on the New Markets Tax Credit Program since 2002. “If we can modernize and make them more efficient, we can support economic development.”

The New Markets program creates an investment intermediary known as a community development entity that can apply for an allocation of the tax credits. Once certified, CDEs secure private investors, who in turn receive a 39% tax credit over seven years as long as they maintain their investment. “That attracts investments into the projects,” Spies said.

CDEs then lend money and make investments in qualifying businesses. These businesses get better terms on their loans over the seven-year period and may not need to pay back the full amount of capital, Spies said.

Many tax-exempt providers wrongly believe they're ineligible for the program. But that's not true, since the tax credits are passed on to investors, not to the provider organizations, said Dr. Jacque Sokolov, chairman and CEO of the Healthcare Community Development Group, a healthcare-specific CDE.

Partly due to the confusion, since the program's inception only 8% of the $30 billion in tax credits have gone to healthcare projects. “There's a tremendous opportunity for healthcare organizations looking at capital projects,” Sokolov said. “This is a key tool that's not being used.”

In 2002, when Sharon Beaty was recruited to turn around the Mid-State Health Center in rural New Hampshire, the primary-care practice was operating in a cramped facility and losing money. The communities it served have an 18.6% poverty rate and unemployment that's twice the national average.

The health center needed a larger building that could accommodate growth and help with recruitment in what was already a designated health-professional-shortage area. It also needed technology upgrades, including an electronic health-record system, to increase efficiency and improve care. “They were not financially sustainable. Their productivity was low,” said Beaty, who is Mid-State's CEO.

Shortly after her arrival, Mid-State partnered with the Capital Region Economic Development Corp. to apply for the New Markets Tax Credit Program. Mid-State was able to build a new 19,000-square-foot facility that opened in 2007, and increased its staff to 85 employees, from 35.

“Without the New Markets Tax Credit, there's no way we would have been able to build the building,” Beaty said. “The New Markets Tax Credit, from our perspective, is a really great program.”

While investment-grade borrowers have enjoyed easy access to financing over the past several months, their lower-rated counterparts are still struggling to access capital, Sokolov said. “Projects have certainly been downsized, and projects are certainly being rethought,” he said. “As money essentially becomes costly, these New Market programs become more important.”

Follow Beth Kutscher on Twitter: @MHbkutscher

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