A hospital in rural Oklahoma has become the first to finance an inpatient construction project by selling bonds to its admitting physicians.
Duncan (Okla.) Regional Hospital, which operates 98 beds, closed a private placement bond sale late last month in which it sold $1.2 million in bonds to 16 physicians to fund an approximately $30 million expansion and renovation.
Most of the project was funded by an earlier public sale of tax-exempt bonds.
The hospital did not want to be publicly identified, said its attorney, Robert Rosenfield, a partner at McDermott, Will & Emery. Modern Healthcare learned the hospital's identity last week by examining public bond documents and credit rating reports.
The sale of bonds to physicians, called participating bond transactions, has sparked interest among not-for-profit hospitals as a way to align economic interests with physicians and discourage them from investing in competing facilities. Their progress has been slow because of legal and economic concerns, including the possibility of review by the Internal Revenue Service or HHS' inspector general's office.
Last year, Lafayette (La.) General Medical Center planned to sell $2 million of bonds to about 40 of its admitting physicians to fund a $75 million heart hospital (May 12, 2003, p. 4). It called off the bond sale to physicians weeks before the July closing date, saying the deal might be imperiled by proposed federal legislation to preclude physicians from owning specialty hospitals.
Duncan Regional, which is adding a surgery center, a birth center and an intensive-care unit along with its inpatient renovation, is the first hospital construction project to use a bond sale to physicians. An unidentified Georgia hospital sold bonds to physicians to finance an $8 million outpatient surgery center last June, said Rosenfield, who said he advised the hospital in that transaction.
Rosenfield said Duncan Regional received a private ruling from the IRS in December stating that the bond sale to physicians would not jeopardize its tax-exempt status. That letter was not released publicly. A separate private IRS ruling, which the agency made public on March 26, approved a plan to set interest rates on the bonds sold to physicians through an auction of similar bonds to outside investors.
Duncan Regional is a sole community provider with three voting physicians on its nine-member board. The hospital decided to offer bonds to the entire medical staff after a group of surgeons proposed building a competing surgery center.
To buy the bonds, physicians had to sign a covenant not to invest in competing ventures. In return, they received what could amount to a sweet financial deal. While somewhat riskier and less liquid than the hospital's traditional senior debt, the subordinated bonds sold to doctors pay tax-free interest of 10%, almost double the rate paid to investors who bought the senior bonds in December.
Most buyers were primary-care physicians, unlike the previous two transactions, Rosenfield said.