Room to Grow: How Small and Critical Access Hospitals Are Financing Expansion Projects

Almost one fifth of the U.S. population lives in a rural area. Small and critical access hospitals play a vital role in rural areas and are likely to offer services that otherwise would not be accessible to residents. As a result, these hospitals may be required to expand and/or renovate their facilities in order to provide additional service lines, adjust the amount of outpatient and inpatient services and improve operational efficiencies and patient amenities.

Expansions and/or renovations to existing facilities can be an ideal option when the costs are below that of a replacement facility or when the economic, financial or political climate is not conducive for a new construction project. To better understand how small and critical access hospitals are able to fund their capital needs, it is helpful to review some real life financings from the past year.

Private Placement

Golden Valley Memorial Healthcare (GVMH) is a nonprofit health care organization that operates a 56-bed acute care hospital, a home health service, and physician and outpatient clinics located in west central Missouri. Although it is a district hospital, GVMH does not currently receive any tax support and is primarily self-funded through operations.

GVMH had experienced a significant increase in the demand for outpatient services and was looking to fund an approximately 100,000 square foot expansion to accommodate that demand as well as future growth. In addition, the hospital wanted to renovate a significant portion of existing space and fund the acquisition of two medical office buildings that it leased.

After considering multiple financing options, GVHM’s board and leadership team chose to issue privately placed, tax-exempt bonds to fund the expansion and renovation. This financing option provided several benefits, including: a low fixed interest rate, a 25-year amortization, the ability to incorporate a drawdown structure and a significant reduction in interest expense during construction.

The $36.2 million financing allowed GVMH to add over 100,000 square feet and to acquire the two medical office buildings it had been leasing. The transaction allowed GVMH to improve all outpatient services including new surgery suites, emergency department, outpatient treatment center, cardiac rehabilitation and an expansion of imaging services. The funding allows the hospital to modernize its current facility to properly address and handle the growth within outpatient services.

              Golden Valley funded an 100,000 square foot expansion using privately placed, tax-exempt bonds.
              Design by HMN Architects, Springfield, Mo.

FHA Sec. 242 and FHA Sec. 241(a)

Fall River Health Services (FRHS) operates a 25-bed critical access hospital (CAH) in Hot Springs, S.D. FRHS provides emergency, acute and long-term health care to the communities in Fall River County as well as Buffalo Gap in Custer County.

Prior to 2010, Fall River Hospital and Castle Manor, its long-term care (LTC) facility, were housed in the same century-old facility. For a number of years, it was apparent that the rural area needed new health care facilities to keep up with modern medical standards. In order to obtain funding in 2007, as the financial crisis unfolded, FRHS leadership decided to build in three phases to make the project financially feasible: fund the construction of a new hospital, fund the expansion of that hospital and then fund the construction of a new LTC unit.

For the first phase, FRHS set up Castle Manor as a separate entity that would stay in the original building for the time being. FRHS then obtained a taxable, fixed-rate $16.7 million mortgage note insured by the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) Sec. 242 mortgage insurance program for its long-term, fixed-rate debt. That loan, coupled with approximately $600,000 contributed from the hospital and the local community, would fund construction on a 15-bed hospital.

In late 2009, to fund the second phase, FRHS closed on a supplemental $2.3 million loan through the FHA Sec. 241(a) program to expand the hospital by an additional 10 patient rooms, bringing it to the CAH maximum of 25 beds. The 42,000 square foot hospital opened in the spring of 2010.

Four years later, FRHS proceeded with phase three of the project. To finance the new LTC unit that would replace Castle Manor, FRHS used the Sec. 241(a) program to obtain a $4 million supplemental loan. The hospital then contributed $2.2 million in equity to fund the replacement facility. By constructing the entire project in stages, FRHS was able to keep its overall risk to prudent levels. In addition, the drawdown feature of the structure is saving the hospital considerable interest expense because funds are allocated at each construction phase instead of being funded entirely at the project’s start.

USDA Community Facilities Loan Program

Box Butte General Hospital (BBGH) is an acute-care provider located in Alliance, Neb., that serves six counties via a network of clinics. BBGH is not taxpayer supported and approximately 65% of inpatient revenues are from Medicare and Medicaid patients. As a result of its CAH status, BBGH can be reimbursed for most of the allowable Medicare and Medicaid costs, including interest and depreciation expenses. The favorable reimbursement environment positioned BBGH to improve its facilities in pursuit of the organization’s mission.

The campus needed to undergo renovation and an expansion in order to keep up with advancing medical technology and meet the shifting demand from inpatient to outpatient services. After community buy-in and approval by the board of a two-story addition and 17,000 square foot renovation, the total project cost totaled $40 million.

BBGH obtained two U.S. Department of Agriculture (USDA) Community Facilities Program direct loans for the project, totaling $28.8 million at a fixed interest rate of 3.5% for 40 years. In addition, the hospital secured a low interest rate construction loan consisting of tax-exempt, variable-rate bonds with a three-year final maturity that were privately placed with a large commercial bank. This series of bonds will be replaced with permanent funding provided by the USDA direct loan upon substantial completion of construction. The drawdown feature of this structure is particularly cost effective as bond proceeds are only drawn as necessary, saving the hospital considerable interest expense.

To fund the remainder of the project, the commissioners of Box Butte County approved issuance of $8 million of limited-tax, general obligation bonds. The commissioners then loaned the funds to BBGH, which will make debt service payments on the county’s behalf to avoid levying taxes. In addition, the hospital was able to take advantage of the lack of new supply of municipal bonds and strong investor demand to lock in an exceptionally low interest rate while also making tax-exempt bonds available to local investors, raising the remainder of funds necessary for the project.

The 93,000 square foot, two-story addition includes a new 25-bed patient care unit, surgery department and other ancillary medical services. Additionally, 17,000 square feet of the existing building will be renovated into a wellness center for rehabilitation and fitness. The project improves the patient experience and privacy with multiple waiting areas, expanded pre- and post-operative rooms and separate labor and delivery rooms. BBGH broke ground in early October 2013 and the entire projected is expected to open in early 2016.

Small and critical access hospitals perform a vital role in the national health care system and are an economic anchor for thousands of small communities, serving 19% of Americans . Above, we have examined three instances where hospitals used diverse funding methods to expand their facilities in order to better serve their populations.

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