A group of investment and mortgage bankers has proposed a revised set of financial covenants to streamline the Federal Housing Administration's mortgage loan guarantee program.
The Health Care Financing Study Group's government relations subcommittee submitted its proposal to federal officials Oct. 6.
The study group, which monitors the impact of legislative, regulatory and reimbursement policies on access to capital in the healthcare industry, was invited by Department of Housing and Urban Development officials to review existing covenants. HUD is the federal agency that administers the FHA's $4.4 billion hospital mortgage insurance program.
The proposed covenants are "radically" different from HUD's current requirements, said Joseph R. Marion, a managing director at Merrill Lynch & Co. and the subcommittee's chairman.
The study group uses debt-service coverage ratios as the main benchmark for determining whether a hospital must seek approvals for HUD for projects it wants to undertake, such as equipment purchases, building construction or leasing of hospital property. Current regulatory covenants restrict the ability of hospitals to do these things without HUD's consent.
The proposal also specifically addresses how hospitals should be treated when they are considering mergers, affiliations and joint ventures, Mr. Marion said.
Pending HUD's review and approval, Mr. Marion declined to provide details of the proposal.
Currently, HUD's insurance program is time-consuming, inflexible and results in "a lot of unnecessary approvals" hospitals must obtain, said Michael E. Mazer, counsel to the Health Care Financing Study Group and a partner in the Washington law firm of Krooth & Altman.
The new rules should cut down on the number of approvals, said John A. Salandra, director of financial operations at Catholic Medical Center of Brooklyn and Queens, New Rochelle, N.Y., which has FHA-backed mortgage financing. Mr. Salandra is among a select group of hospital representatives and attorneys who were asked to review a draft of the proposed changes.
Hospitals need increased flexibility to respond to marketplace changes, finance experts said.
"The proposed covenants go part of the way to addressing that goal," said Rick Dennett, a partner in the law firm of Garfunkel, Wild & Travis in Great Neck, N.Y. "The rest of the way involves the ability of lenders of the world to understand what healthcare is going through and to be able to react and respond with borrowers to changes," he said.
The changes will disproportionately affect New York hospitals. Three of every four projects in HUD's hospital insurance portfolio are based in New York state; two-thirds of those are in Manhattan, said Otha R. Dillihay, who just stepped down as director of HUD's hospital mortgage insurance program to accept a healthcare administration post in North Carolina.
Mr. Dillihay spoke at a recent capital finance symposium sponsored by the Healthcare Association of New York State. "Without this program, the health facilities infrastructure in New York probably wouldn't be as far along as it is," he said.
Meanwhile, HUD is trying to ensure that by meeting New York's needs, "we don't take away from the rest of the nation," he said.