Funding Rural Health Care Capital Needs

Terry J. Hill,Executive Director,Rural Health Resource Center - Duluth, Minnesota

Rural Health Resource Center

• Located in Duluth, Minnesota

• Private, Non-profit

• National scope

• Multiple projects funded by HRSA’s ORHP

Small Hospitals Face Difficulty with Access to Capital

• Findings from a recent survey of CFOs of not-for-profit hospitals highlight the current uneven access to capital for not-for-profit hospitals in the U.S.

• There is a widening gap between hospitals identified as having broad access to capital and those identified as having limited access to capital.

March 2005. The Availability and Use of Capital by Critical Access Hospitals. Flex Monitoring Team

The GAP Widens

• This tightening was fueled by a marked drop in market and lender confidence after a series of major health care investment failures. Bond issues dropped 30 percent between 1998 and 1999 followed by an additional 40 percent by 2000.

• The 2000–2001 recession further tightened capital markets including local non-loan capital sources as the national crisis continued and state deficits reached record levels.

March 2005. The Availability and Use of Capital by Critical Access Hospitals. Flex Monitoring Team

Critical Access Hospital Survey: U of MN

• Random Sample of 500

• Responding hospitals 474

- 259 included in past CAH surveys

- 215 certified between 5/1/01 – 12/1/01

• Response rate 95%

Immediate Capital Needs (N=200)

Average Cost = $2,380,000

• Remodel/Expand Plant $ 2.0M34%

• Remodel/Expand Clinic $ 1.7M32%

• Clinic Equipment $ .6M17%

• Information Technology $ .5M 9%

• Total Replacement $11.8M 8%

Capital Effort to Obtain Capital (N=474)

• Facilities Pursuing Loans 42%

- 86% Successful Applications

• 46% Specified Capital Needs

- 14% Unsuccessful Applications

• 48% Specified Capital Needs

• Facilities Not Pursuing Loans 58%

- 39% Specified Capital Needs

• Operating Revenue/Reserves 27%

• Solid Preparation/Business Plan 21%

• Find the Right Co-Signer 17%

• Improved Reputation Since CAH 10%

• Board Member Involvement 8%

• Demonstrated Need 6%

• Government Loan Guarantee 6%

• Strong Local Support 6%

Most Important Factors in Loan Success

• Poor Financial History/Debt Too High 27%

• Poor Cash Flow/Reserves 21%

• Local Economy/Market Too Volatile 17%

• Organizational Indecisions/Resistance 10%

• Process of Pursuing Loan (paperwork) 8%

• Poor Community Support 6%

Biggest Barriers to Capital Loan Success

Non-Loan Capital Projects

March 2005. The Availability and Use of Capital by Critical Access Hospitals. Flex Monitoring Team

Non-Loan Funding Sources

March 2005. The Availability and Use of Capital by Critical Access Hospitals. Flex Monitoring Team

Key Findings

Key findings from this study include: (For any of these findings you could insert rural health care)

• Critical Access Hospitals have significant capital needs. The magnitude of the need for our study sample suggests that a conservative estimate of their capital need exceeds $1.6 billion.

• CAHs have not been able to adequately address the growing demands for health information technologies.

March 2005. The Availability and Use of Capital by Critical Access Hospitals. Flex Monitoring Team

Key Findings Cont’d

• More than one-quarter of all CAHs are using leasing arrangements to expand their capacity to meet local health care needs. Virtually all of the leasing arrangements target the use of advanced clinical technologies such as digital x-ray, CT scan, and MRI equipment.

• Capital funds obtained through grants, contributions and fundraising have become a significant strategy for supporting major CAH projects and are often bundled with loan capital to implement large projects.

March 2005. The Availability and Use of Capital by Critical Access Hospitals. Flex Monitoring Team

Access to Hospital Capital Trends

• The mix of hospital capital has changed- Bank loans decreased from 36% ($19.7B) to

7% ($2.7B)- Tax-exempt bonds increased from 39%

($21.2B) to 54% ($19.8B)- Leasing increased from 7% ($3.7B) to 10%

($5.8B)- Philanthropy increased from 5% ($2.7B) to

10% ($3.6B)

Search Tools

•Online

•Newsletters

•Publications

•Listservs

•Purchased programs or CD-ROM

•www.ruralcenter.org

•http://networkassist.ruralhealth.hrsa.gov/resources.shtml

• Rural Assistance Center – www.raconline.org

• Department of Labor – www.dol.gov

• Office of Rural Health Policy – www.ruralhealth.hrsa.gov

• Catalog of Federal Domestic Assistance – www.cfda.gov

• The Federal Register – www.access.gpo.gov/su_docs/aces/aces140.html

• The Office for the Advancement of Telehealth (OAT) Grant – www.telehealth.hrsa.gov.

• USDA Community Facilities Program – www.rurdev.usda.gov/recd_map.html. Direct loans, loan guarantees and grants to construct, enlarge, extend or otherwise improve community facilities that provide essential services to rural populations.

• USDA Rural Utilities Services (RUS) – www.usda.gov/rus/telecom/dlt/dlt.htm

Sources to Search

Sources to Search

• The Foundation Center – www.fdncenter.org . Publishes a weekly free subscription newsletter with funding opportunities across the country. The website also has funding sources cataloged by category and a foundation locator.

• Chronicle of Philanthropy

• Grantmakers in Health – www.gih.org. This organization for healthcare grantmakers publishes a biweekly bulletin that includes information regarding new grant programs and recent grant initiatives of it’s members.

• The Grantsmanship Center– www.tgci.com/funding . This site publishes and archives Federal Register grant announcements daily. Usually updated by 10:00 am CST.

• National Rural Health Association (NRHA) – www.nrharural.org/pagefile/grants.html . The NRHA publishes grant announcements for the Multi-Plan/NRHA grant program and other programs, including some federal announcements.

• Department of Health and Human Services

- Federal Office of Rural Health Policy

www.ruralhealth.hrsa.gov• Department of Housing and Urban Development (HUD)• Department of Agriculture (USDA)• Department of Education• Department of Commerce• Department of Transportation• Department of Labor• Department of Justice• Department of Defense• Environmental Protection Agency• National Highway Traffic Safety Administration (NHTSA)

Federal Agencies to Investigate

• Rural Utilities Services (RUS) Grant/Loan Program

- Distance Learning/Telemedicine

• Essential Community Facilities Program

- Capital improvements/building

USDA

Distance Learning and Telemedicine (DLT) Grant Program Features

• Annual Application Period

• Competitive Application Process

• 15% Required Matching Contribution

• $50,000 Minimum

• $500,000 Maximum

Community Essential Facilities Program

• Community Programs provides grants to assist in the development of essential community facilities in rural areas and towns of up to 20,000 in population. 

• Grants are authorized on a graduated scale. 

• Applicants located in small communities with low populations and low incomes will receive a higher percentage of grants.

• Grants are available to public entities such as municipalities, counties, and special-purpose districts, as well as non-profit corporations and tribal governments.

• In addition, applicants must have the legal authority necessary for construction, operation, and maintenance of the proposed facility and also be unable to obtain needed funds from commercial sources at reasonable rates and terms.

Amount of Grant

• The amount of grant assistance for project costs depends upon the median household income and the population in the community where the project is located and the availability of grant funds.

• In most instances, projects which receive grant assistance have a high priority and are highly leveraged with other loan and grant awards. Grant assistance may be available for up to 75% of project costs.

Fund Uses

• Grant funds may be used to assist in the development of essential community facilities. 

• Grant funds can be used to construct, enlarge, or improve community facilities for health care, public safety, and community and public services.  This can include the purchase of equipment required for a facility's operation. 

• A grant may be made in combination with other CF financial assistance such as a direct or guaranteed loan, applicant contributions, or loans and grants from other sources.  

How to Apply

• Applications are filed with the USDA Rural Development field offices. 

• Rural Development staff will be glad to discuss a community's needs and the services available from Rural Development and sister agencies within USDA. 

• Detailed information and applications for financial assistance are available through Rural Development State Offices

HUD 242

• Established in 1968, the HUD 242 Mortgage Insurance Program provides "urgently needed" hospitals with access to affordable financing. Administered by the US Department of Housing and Urban Development (HUD) and Health and Human Services (HHS), HUD 242 Mortgage Insurance acts as a loan guarantee that enhances the creditworthiness of hospitals, enabling facilities of all sizes throughout the United States to obtain AAA credit ratings on their debt obligations

• HUD is now actively pursuing a strategy of geographic diversification and an expansion of its loan portfolio to include smaller hospitals.

HUD 242 Applications 

• Construction  

• Modernization   

• Remodeling  

• Expansion   

• Equipment Purchase    

• Refinancing

• Acquisition

General Terms

• Loan-to-value of 90%.   

• Hospital's 10% equity requirement may consist of a combination of property, plant, equipment, and cash.    

• HUD insures 99% of the loan amount.  

• Remaining 1% of the loan is covered by a letter-of-credit.    

• Maximum loan term is 25 Years (plus the construction period).    

• No limit on the amount that can be insured.

Limitations of HUD 242

• Only 3-5 project completed in last few years despite new emphasis on small rural

• Very long process 18 months-3 years

• Is not a loan program, it’s mortgage insurance

• Normally need a broker to help facilitate --- www.ruralcenter.org/consult

For More Information on HUD 242

• Call the FHA at 1-877-263-0763 to start the

discussion

• Find your local HUD office by calling HUD

at 202-708-1112

State Resources

• Minnesota Health Department

• Minnesota Office of Rural Health and Primary Care: http://www.health.state.mn.us/divs/chs/grants.htm

• EMSRB

• Office of Public Safety

Private Foundations that Fund Capital in MN

• Andersen Foundation

• Bayport Foundation

• Otto Bremer Foundation

• General Mills Foundation

• Ordean Foundation

• The Southways Foundation

• The McKnight Foundation

• U.S. Bankcorp

• Minnesota Council on Private Foundations http://www.mcf.org/

Other Sources

• Bond Issues

• Tax Levies and Districts

• Local Banks

• National Capital Sources

- e.g. Pine Creek Healthcare Capital

Things to Keep in Mind:

• Know where you’re going. Capital needs should be driven by strategies.

• Know how each potential capital investment will contribute to strategic performance.

• Capital should be part of your overall strategy – Don’t think about it on a project by project basis.

• Plan early and give yourself adequate time.

• Hardest time to be looking for funding is when you need it most.

• Hardest non-loan funds to acquire are for capital and equipment.

• Start local first, the more national in scope, the more competition and usually, a longer process.

• Look to non-traditional sources of capital.

• Know the story you want to tell.

Things to Keep in Mind cont…