Moving mentally ill and addicted patients out of expensive inpatient settings into community-based health programs makes financial sense and can be better for patients.
But the options for raising money to build and renovate facilities for treatment, counseling and other social services are very limited. Not-for-profit community health providers generally have had to "beg, borrow and steal," said John Briggs, a former director of the Illinois Department of Mental Health.
It's particularly a concern now that many hospitals are looking to add community health providers to integrated delivery networks. Community-based providers of mental health and substance-abuse services could be locked out of developing networks if their facilities are shoddy.
But one Chicago-based provider of mental health and substance-abuse services thinks it has come up with a unique solution. By issuing more than $2 million in taxable bonds on its own, the Human Resources Development Institute was able to purchase and renovate its facilities without the red tape involved in a tax-exempt issue. The purchase provided the infrastructure HRDI needed to begin negotiating managed-care contracts, which will give it some fiscal independence from the state. Its first two contracts are expected to be signed in the next few weeks.
In the year ended June 30, 1991, before the bond sale, government contracts accounted for 72% of the institute's revenues of $8.4 million. Currently, the institute receives 79% of its $8.8 million in revenues from government contracts. The increase in government funding reflects HRDI's Medicaid certification.
Using the same idea, a second bond sale is being planned by a larger group of providers. This time, an estimated $10 million in bonds will be sold by a special corporation that includes HRDI and five other Chicago-based community mental health providers. The bonds will be sold within the next three to four months.
HRDI was founded in 1974 by a group of civic leaders from Chicago's South Side who were concerned about the lack of appropriate, culturally sensitive mental health and social services for African Americans. It operates 23 community health, mental health, and alcohol and substance-abuse treatment programs at 11 facilities.
The institute's first sale of $2.3 million in taxable mortgage bonds in January 1992 was made possible through agreements with the state Department of Mental Health and Developmental Disabilities and the Department of Alcohol and Substance Abuse. The institute agreed to pledge future payments from the agencies as collateral on the bonds. However, those state contracts must be renegotiated annually.
Some $1.9 million of the proceeds from the 8.5% term bonds, due in 1996, were used to purchase and renovate five treatment facilities and the administrative office and to refinance some existing debt. A total of $200,000 was placed in a debt-service reserve fund, and the rest went for issuance costs.
The savings in time and expense of issuing bonds on its own offset the higher rate of interest paid on the taxable deal, said John Briggs, the former state official who was retained by HRDI to develop a financial restructuring plan. At that time, the typical 30-year tax-exempt healthcare issue was trading for 1.5 less percentage points than the 8.5% HRDI had to pay on its taxable debt.
But HRDI executives calculate that the organization saved $500,000 annually by retiring leases and higher-rate mortgage debt. The quick cash infusion enabled the institute to make capital improvements that attracted the interest of managed-care providers as well as other business.
HRDI's bond sale was a key part of a financial and operational turnaround undertaken in 1989 after an expose in the Chicago Sun-Times suggested HRDI's management was involved in financial improprieties. Although state and federal auditors cleared the organization of any wrongdoing, accountants brought in by HRDI questioned the organization's financial viability, Mr. Briggs said.
Rather than issue tax-exempt bonds through the state bond-issuing authority, HRDI sought to create its own credit in the marketplace. "We decided that corporations would be receptive to a social-conscious investment if it were a sound financial investment," Mr. Briggs said.
Because the credit was new to investors, the bonds sold "with difficulty in the beginning," Mr. Briggs said. Some investors also may have shied away because the bonds were unrated and the investment was considered risky. But those institutional investors who responded were rewarded with a solid return on their money.
"The thought was, if we don't do something to improve the quality and quantity of healthcare in the inner cities, the inner-city problems will be far from resolved," Mr. Briggs said.