Living in the north country of Michigan's Upper Peninsula, Jim Bogan hadn't heard much about the Federal Housing Administration's Office of Insured Health Facilities in Washington.
But when Bogan realized in 1998 that he needed to replace 44-bed Portage Health System in Hancock, Mich., he and his staff began looking at financing options. That's when the president and chief executive officer of not-for-profit Portage learned about the FHA office and the cost savings it offered.
The original hospital, completed in 1951, lacked space for outpatient services and was inefficient. The $30 million, 30-bed replacement hospital and physician office building, which was completed last year, required a $24.6 million loan, Bogan says. When he realized the high cost of traditional financing, he began searching for alternatives.
"On the open market we were looking at an 8.25% interest rate, but with the FHA's backing, we qualified for a 5.8% loan, which will save us millions over the 25-year life of the loan," Bogan says.
To most of the nation's 5,000 acute-care hospitals, the FHA office remains a well-kept secret. But since its formation in 1968, the agency, under the auspices of the U.S. Department of Housing and Urban Development, contracts with HHS to back hospital mortgage loans and has insured more than $9 billion worth of mortgages for about 300 hospitals. In the process, it has saved those hospitals millions of dollars in interest payments. That's because the loans are guaranteed against default by the government, often with the equivalent of an AA bond rating, allowing the recipient hospitals access to the most favorable interest rates.
To qualify, acute-care hospitals must have less than 50% of their revenue derived from rehabilitation, convalescence, substance-abuse treatment, mental patients or tuberculosis. Hospitals must be financially strong enough to service the loan and be willing to pay a one-time fee of 0.8% of the loan amount upfront, along with a fixed annual mortgage insurance premium of 0.5% of the remaining balance. The FHA insures 99% of the loan amount. There is no limit to the size of the loan, but the maximum loan term is 25 years. Applications typically take less than four months to process.
Roger Miller, deputy director of the agency, says the low profile is partially attributable to geography. Most mortgage bankers work in the New York area and have focused on hospitals in that region, he says.
"I think that this particular program isn't very well known for a number of reasons. We were reluctant in prior years to go out proselytizing and advertise our services," Miller says. "There was a feeling that the programs were already in place and we shouldn't market them. We depended a lot upon the mortgage banker community to spread the word. But recently we've been reaching out to hospitals in places like Texas, Michigan and California. Our programs are becoming better known now. Our inquiries have increased fivefold in the last four years."
He says another barrier has been that the FHA requires certificate-of-need approval in states that have CON programs, and a similar, substitute approval is mandated for hospitals in states without such programs.
"That can take time," he says. "But we've worked out plans with California and Texas and expect more hospitals to apply from those states." He says that as more hospitals have turned to ambulatory care in response to government and private insurance reimbursement changes, how those facilities operate and what they need to succeed have also evolved, spurring a building boom and a scramble for funding.
Miller says the FHA office's Section 242 mortgage insurance program was intended to replace the 1946 Hospital Survey and Construction Act, better known as the Hill-Burton Act, which financed hospital construction from after World War II into the early 1970s.
Miller says the mission of the FHA, and his office, is community development.
"We view the hospital as a critical component of the local economy," he says. "Often community hospitals are the largest employers in town. Without them, business and industry might not come to a community. Those hospitals also stimulate the local and regional economy because of their purchasing power." Miller says the FHA office insures mortgage loans for capital equipment purchases, renovation projects and new facility construction. Qualified hospitals that are paying high interest rates on original loans also can refinance at lower rates.
Miller says most loans have been for urban hospitals, primarily in the Northeast.
"They have faced some tough times," he says of big-city hospitals, noting that especially in New York, tightly regulated reimbursement rates have hurt profitability and reduced access to capital. But more rural facilities have started to apply for FHA-backed loans.
"Investment bankers are not interested in small construction and rehabilitation projects, and there is a financial risk," Miller says. "We see a serious need there for HUD to fulfill its mission to reach out and provide services. The critical-access designation now provides these hospitals with cost-based reimbursement, which makes them better able to service debt and repay the mortgage. We're looking at the critical-access program to diversify our portfolio rapidly."
The critical-access program allows qualified small, mostly rural hospitals, designated as healthcare providers that are critical to their communities, to obtain cost-based reimbursement from Medicare, rather than through the prospective payment system.
Although the FHA office's program was originally intended for not-for-profit hospitals, the agency can insure the debt of for-profit hospitals as well, says John Whitehead, FHA operations officer.
"We haven't done many yet," Whitehead says, pointing out that 34-bed Healthmark Regional Medical Center in De Funiak Springs, Fla., was the most recent in 1998.
Miller says most for-profit hospitals can secure financing themselves or belong to organizations that can easily tap into the capital market. For-profits also are considered better credit risks.
Bailing out bankruptcies
The FHA office also has helped save bankrupt hospitals.
David Rosen, president and CEO of 293-bed New York Flushing Hospital Medical Center, encountered the agency in March 1999 when not-for-profit MediSys Health Network considered taking over the bankrupt facility. MediSys, which is the parent of two other New York-area hospitals- 384-bed Jamaica Hospital Medical Center and 973-bed Brookdale Hospital Medical Center in Brooklyn-was concerned about an outstanding $16 million FHA-insured loan held by the hospital.
The facility lost $13 million in 1997 and again in 1998, and had lost another $3 million when MediSys took over. Rosen says the FHA was helpful and flexible, allowing MediSys to tap Flushing's required reserves to finance projects such as Y2K-compliance initiatives.
"They understood that we had to be in business to pay back the loan," Rosen says. "We found them to be flexible and patient until we were able to get Flushing back on its feet and take it out of bankruptcy within 14 months after our arrival. We salvaged their loan and the hospital and worked together to make it happen." Flushing finished 1999 in the black, Rosen says, and he expects it to post net income of $2.9 million for 2000 on total revenue of $150 million. "They were really everything you'd hope for in government officials. They repeatedly demonstrated their willingness to be other than bureaucrats and bankers."