As the case study noted, the hospital would not have qualified for the traditional FHA 242 program because it did not have positive operating margins. But because FHA has different underwriting provisions for critical-access hospitalsand because Bucyrus was designated as suchLancaster Pollard was able to recast the facilitys financials as if it had been receiving cost-based Medicare reimbursement for the three years prior to applying for the federal mortgage insurance. The hospital has nearly completed 50,000 square feet of renovation and additions, which include a new main entrance, oncology department, and operating and emergency rooms.
The firm also used FHA 242 as a financing option for 48-bed St. Marks Medical Center in La Grange, Texas. The facility replaced Fayette Memorial Hospital, which was built in 1920 and was relocated in 1967 through the Hill-Burton act, according to Lancaster Pollard. Hill-Burton is a post-World War II federal program intended to improve and modernize hospital facilities. St. Marks options were limited. It did not have a strong credit profile, which meant the hospital would face higher interest rates when borrowing. And the hospital could not partner with a local for-profit system because the community wanted it to remain independent. St. Marks eventually worked with Lancaster Pollard on the FHA 242 program and was able to issue $26 million in tax-exempt bonds with the equivalent of an AAA rating.
According to the FHA, it has insured 358 hospital mortgages totaling $13.5 billion to providers ranging from small rural facilities to urban teaching hospitals in 42 states and Puerto Rico since the program began in 1968. But even with FHA 242s benefits of lower interest rates, enhanced credit and a loan-to-value rate of about 90%, some hospitals dont even know the program exists. That was the case for William Lammers, health systems adviser in HUDs office of insured healthcare facilities, which oversees the program, who says he was unaware of FHA 242 when he served as the chief financial officer of a 12-hospital system in the Midwest. Another reason is that the process used to be more laborious than it is today.
In that time period, there were some horror stories where it might have taken a year or more to have an application processed, says Lammers, who added that the office has increased its workforce to help make the process more efficient. In 2007, it took 51 days for HUD to complete an application, compared with 115 days in 2006 and 224 days in 2005, says Steven Hunt, a senior account executive in HUDs Office of Insured Health Care Facilities. And in addition to making the process less cumbersome, the office has boosted its marketing efforts. It has advertised the program and has dropped the FHA 242 title in favor of mortgage insurance for hospitals, which might resonate more with providers. The office also has worked to expand the programs reach, especially after a 1996 report from the agency that was then called the General Accounting Office showed that large loan amounts to New York posed a risk for the future stability of the program.
We felt a need to get the word out that we had a program, Hunt says. We had a significant part of the portfolio in New York state. A GAO review of our program notified that we should geographically diversify our portfolio.
The changes have produced results. Prior to 2004, there were about two to four applications processed in a year, but additional staff memberswho have experience working with hospitalshave helped, Lammers says. There were nine loans totaling $647 million in six states in 2007, and nine loans totaling $943 million in seven states the year before.
We dont exist for the hospital thats in deep trouble and the very strong hospitals that can access capital on their own, Lammers says. But there is a whole range of hospitals in the middle that tie into FHAs mission, he says, adding that there is a tremendous need for capital for construction and equipment in healthcare today. Also, the FHA provides architects and engineers to work closely with hospitals, given that the FHA must approve the construction projects before it releases the money.
Such efforts to improve the process could help to break down the stereotype about government-run programs that might be keeping hospitals from considering the program. Thats a barrier that Green of Lancaster Pollard says is a concern for some healthcare providers.
I would say the primary reason is that the government in total doesnt have a good reputation with businesswhether its earned or not, Green says. When in doubt, dont get in partnership with the government is the theme. Sometimes they can be difficult. Thats the perception. In the case of many of the programs that we utilize, on balance, when you weigh the positives against the real negatives or perceived negatives, I think the (government) programs fare very well.