The fiscal condition of the federal government's $5 billion hospital mortgage insurance program is at risk, according to a report by the General Accounting Office, Congress' investigative arm.
The vast majority of those loans-$4.2 billion-are to New York state hospitals, and the GAO says that means the Department of Housing and Urban Development's hospital mortgage program is especially susceptible to changes in state policy and reimbursement. A single default of a large New York loan "could significantly burden the program," investigators noted in a report dated Feb. 27.
While hospitals face no immediate disruptions, "it would be very premature" to suggest any potential changes in the program's policy and direction until Congress reacts and HUD has more time to review the GAO's recommendations, said Donald Kaplan, a senior policy adviser on the Federal Housing Administration's hospital mortgage insurance staff.
HUD insures loans to finance hospital construction and renovation through the FHA's Section 242 program. New York hospitals, the biggest benefactors, have difficulty accessing private capital because of the state's restrictive reimbursement system (See related story, p. 28), the GAO noted. As a result, New York hospitals "unduly rely" on the FHA for insurance to guarantee that bondholders will be paid in case of default.
As of Sept. 30, 1994, the FHA determined that it would need to retain $458 million in reserve, or 11% of the unpaid principal balance of the hospital portfolio, to offset losses through 2002. While the program remains solvent, the GAO contends that the FHA "used questionable assumptions" in estimating potential losses from defaults.
HUD officials disagree. "We feel pretty confident that the model that was used is a reasonable and accurate portrayal" of potential losses, Kaplan said. Since 1969, the portfolio's rate of defaults and claims has averaged 2.5%
HUD is preparing a formal response to the report, which makes three specific recommendations for reducing program risks. Kaplan said the recommendations are "under very serious consideration" in terms of how they might be implemented.
One focuses on steps for improving the reliability of the program's "loan loss reserve" estimate, said James McClyde, assistant director in the GAO's health education and human services division on health financing and public health issues.
Another recommends that HUD develop measures and collect data to track the program's performance. As an example, the report said HUD doesn't measure the program's impact on local employment or community stabilization. Such data would help HUD determine the strategic importance of the program to its mission and evaluate the program's value, the GAO said.
Finally, the report calls for "risk-sharing arrangements" that would enable HUD to share program risks and rewards with a private- or public-sector partner.
HUD is developing a draft regulation that would allow the department to enter partnerships with interested parties, such as state hospital finance agencies, to share financial risks and insurance premiums. "We're hopeful that it will be out within the next several months," Kaplan said.