Bargain hunters know it's cheaper to buy in bulk than to purchase items separately. That's as true for capital as it is for anything else.
And that's why more hospitals and health systems are either buying their short-term capital as a group or buying it in large quantities and spending it as needed.
In finance, bulk purchases of capital are called pools, and lately they're making a big comeback:
In June, the Florida Hospital Association's management services arm expanded its capital offerings with a $300 million pool. Over a three-year period, as many as 17 member hospitals are expected to draw loans from the pool.
Three hospitals and a hospital foundation in Indiana participate in an $18.4 million pool created in April through the sale of variable-rate bonds. Pooling saves some of the issuance costs that an individual borrower would have to bear alone, says Paul Janssen, chief financial officer of Henry County Memorial Hospital in Newcastle, Ind., one of the pool participants.
Partners HealthCare System and CareGroup, both based in Boston, each administers its own pool in collaboration with the Massachusetts Health and Educational Facilities Authority. Partners' $150 million "recycling pool," established in June 1997, is believed to be the first pool structured so that a system can manage its own short-term capital needs and those of affiliates over 30 years.
Cain Brothers' Houston office is working to establish two to three pools in different states. George K. Baum's New York office has participated in three this year, including the Florida pool and programs in Ohio and Kentucky. Chicago-based John Nuveen & Co. also has a piece of the pool action.
Pool programs vary, but the underlying structure is the same. Tax-exempt bonds are issued on behalf of a single large system or a group of hospitals. The proceeds are invested, and loans are made as needed. Typically the money must be used within three years for projects specified in the bond documents. In a "recycling pool," money that is repaid to the pool may be loaned out again.
Pools were popular in the mid-1980s, says Bruce Deskin, a principal with Cain Brothers in Houston. Back then, bonds were sold without having to specify the projects that would receive funding. The Tax Reform Act of 1986 barred the creation of new "blind pools" because of perceived abuses in the use of tax-exempt debt. At that time, proceeds were invested at higher interest rates than the interest rates on the bonds, and those "arbitrage" profits paid for program expenses. Today when a pool is created, the bond documents must specify who will receive loans from the pool and how the money is to be used.
Pools are catching on again, says Deskin, because of a pent-up demand for capital.
Hospitals find the idea appealing, experts say, because it enables them to keep costs down and minimize documentation requirements.
"When you do a stand-alone bond issue, you have to pay costs to a lot of different parties," says Liz Keating, an assistant vice president in Cain Brothers' Houston office. There are underwriting costs and attorneys fees, for example. Hospitals save by sharing those costs and issuing enough debt to finance all of their capital needs. "The work involved for putting together a $10 million bond deal and a $100 million bond deal is basically the same," she says.
"The only downside is timing," Deskin adds. When a borrower issues its own debt, it can coordinate that offering with an impending project. With pooling, it's more difficult to align the sale of the bonds with various borrowers' capital requirements. Generally, tax-exempt funds must be used within three years.
The Florida Hospital Association's management services subsidiary has been involved in managing pools since 1985. Working with local bond-issuing authorities, it has administered some 60 to 70 loans to 40 or 50 institutions, says John Mines, senior vice president of the FHA Management Corp.
It still manages a handful of 1985 recycling pools. But this year it created another $300 million pool to meet member demands for equipment and renovation capital over the next three years.
Mines says one $5.1 million loan went to Halifax Medical Center in Daytona to reimburse itself for operating room renovations financed from operating funds.
In the near term, the FHA plans to lend an additional $22 million. Over a 12- to 18-month period, member hospitals are expected to tap another $40 million to $60 million from the pool.
Interest rates on the Series 1998 bonds are reset weekly. One recent Wednesday, the rate was 4%; a month earlier it was 2.8%. Through a weekly "remarketing" process, institutional investors who no longer want to hold the paper at the new rate can drop out, and new buyers are found.
The amount of money any one hospital saves, compared with issuing debt on its own, depends on its creditworthiness, the project being financed and the term of the financing, Mines says.
Pooling may be ideal for small borrowers who may not be able to sell bonds to finance their own short-term capital needs. But some large borrowers also find the structure appealing. The Massachusetts Health and Educational Facilities Authority's $150 million pool with Partners HealthCare and $75 million pool with CareGroup enable those systems to centrally manage their routine capital needs. That money will be available to system members and affiliates over 30 years. As loans are repaid, the money may be loaned out again-without spending another dime in issuance costs.
In addition to interest rates in the high-2% to low-3% range, the recycling pool gives borrowers needed flexibility, says Patricia Fahey, director of financing programs for the Massachusetts financing agency.
"They will have that capital available without going back into the capital markets to issue new debt," she says. "I think with the emphasis . . . on healthcare systems, (making loans from a pool is) just a smart idea," she says.