As pressure to reduce healthcare costs grows and deep cuts to Medicare and Medicaid loom, many hospitals and health systems are turning to alternative means of obtaining capital. For example, hospitals are using real estate investment trusts, private equity firms, the Federal Housing Administration's Hospital Mortgage Insurance Program and other alternative sources of funds to finance capital programs. Fred Campobasso, managing director of consulting firm Navigant, explains six alternatives to traditional capital resources.
1. Real estate investment trusts. REITs have a great deal of available capital that many hospitals have started tapping into, Mr. Campobasso says. For example, in April, Sabra Health Care REIT purchased the real estate of Texas Regional Medical Center at Sunnyvale for $62.7 million and plan to lease it to the center and a group of approximately 75 physicians who practice at the center. In 2010 alone, healthcare REITs made more than $11 billion in acquisitions.
2. Federal Housing Administration funds. Federal government programs, such as the Federal Housing Administration Section 242 Hospital Mortgage Insurance Program under the Department of Housing and Urban Development, have also provided hospitals with alternative sources of capital for expansion and development. For example, the Effingham Hospital in Springfield, Ga., recently received a $30.94 million loan from the FHA for modernization projects.
A surprising trend, according to Mr. Campobasso, is that in the past 12-24 months even some of the stronger hospitals were using the FHA program to fund capital projects. "It was unprecedented because in the past, [hospitals] have looked at the FHA financing program as a last resort," he says. While stronger hospitals are choosing this option less, he says the FHA program may have gained ground among healthcare organizations because the overall terms and conditions including cost of capital were competitive to traditional financing as the country transitioned out of the economic recession. "If you analyze the overall transaction cost of capital compared to traditional tax-exempt bond terms and requirements, [the FHA] was a very viable alternative because the spread was narrower," Mr. Campobasso says. In addition, in the past the transaction time for FHA funding was approximately two years, but recently decreased to 12-14 months, making the option more attractive to healthcare organizations in need of capital.
3. For-profit/Non-profit partnerships. One way non-profit hospitals have been accessing capital is through partnerships or acquisitions by for-profit hospitals or health systems. For example, for-profit Plano, Texas-based LHP Hospital Group and non-profit St. Mary's Health System in Waterbury, Conn., are planning a joint venture, which would convert St. Mary's into a for-profit hospital. Relationships between for-profit and non-profit healthcare organizations can benefit both groups by providing the non-profit system with needed capital and providing the for-profit system with added resources.
4. Private equity investment. Private equity firms' investment in healthcare is a new and growing trend that presents an attractive option to many financially unstable hospitals. "Private equity firms investing in healthcare systems is a paradigm shift that was not necessarily expected," Mr. Campobasso says. Although unexpected, private equity firms can benefit through these acquisitions by using their capital to develop hospitals and health systems into profitable organizations. "The idea is that [the firms] can deploy their equity investments in these operations, create critical mass by buying multiple facilities and create efficiencies that increase return on investment, put[ting] them in a position to, in a 5-10-year period, go back out and remarket and sell these assets for a significant profit," Mr. Campobasso says.
5. Reuse of buildings. Another alternative to financing hospital projects that is growing in popularity is reusing both existing on- and off-campus structures, according to Mr. Campobasso. "There's a lot more focus and emphasis on combining operational process improvement with retrofitting existing space [rather than] building new," he says. Mr. Campobasso predicts this trend will continue because it is an effective strategy hospitals can use to improve efficiency without putting more real estate on their balance sheets. "Take existing brick and mortar resources and get more efficiency and more throughput with some modification to the facility."
6. Shared space. In addition to repurposing current buildings, hospitals and health systems are sharing real estate with physician offices and other providers to both improve quality and reduce costs of expansion or renovations. "The traditional medical office buildings where physicians have their own business offices, waiting rooms, clinical areas — that paradigm is going to change and [you're going to] see more shared services. [This will] reduce real estate and facility cost at the same time it improves patient experience, reduces cost and improves quality of care," Mr. Campobasso says. Mr. Campobasso suggests buildings whose design supports clinical integration through shared space can also improve patient experience by increased access and better outcomes. "Whether there to see a physician and/or receive diagnostic services, it will be easier for the patient to move through the facility and receive care in a timely and very efficient basis."
Learn more about Navigant.
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1. Real estate investment trusts. REITs have a great deal of available capital that many hospitals have started tapping into, Mr. Campobasso says. For example, in April, Sabra Health Care REIT purchased the real estate of Texas Regional Medical Center at Sunnyvale for $62.7 million and plan to lease it to the center and a group of approximately 75 physicians who practice at the center. In 2010 alone, healthcare REITs made more than $11 billion in acquisitions.
2. Federal Housing Administration funds. Federal government programs, such as the Federal Housing Administration Section 242 Hospital Mortgage Insurance Program under the Department of Housing and Urban Development, have also provided hospitals with alternative sources of capital for expansion and development. For example, the Effingham Hospital in Springfield, Ga., recently received a $30.94 million loan from the FHA for modernization projects.
A surprising trend, according to Mr. Campobasso, is that in the past 12-24 months even some of the stronger hospitals were using the FHA program to fund capital projects. "It was unprecedented because in the past, [hospitals] have looked at the FHA financing program as a last resort," he says. While stronger hospitals are choosing this option less, he says the FHA program may have gained ground among healthcare organizations because the overall terms and conditions including cost of capital were competitive to traditional financing as the country transitioned out of the economic recession. "If you analyze the overall transaction cost of capital compared to traditional tax-exempt bond terms and requirements, [the FHA] was a very viable alternative because the spread was narrower," Mr. Campobasso says. In addition, in the past the transaction time for FHA funding was approximately two years, but recently decreased to 12-14 months, making the option more attractive to healthcare organizations in need of capital.
3. For-profit/Non-profit partnerships. One way non-profit hospitals have been accessing capital is through partnerships or acquisitions by for-profit hospitals or health systems. For example, for-profit Plano, Texas-based LHP Hospital Group and non-profit St. Mary's Health System in Waterbury, Conn., are planning a joint venture, which would convert St. Mary's into a for-profit hospital. Relationships between for-profit and non-profit healthcare organizations can benefit both groups by providing the non-profit system with needed capital and providing the for-profit system with added resources.
4. Private equity investment. Private equity firms' investment in healthcare is a new and growing trend that presents an attractive option to many financially unstable hospitals. "Private equity firms investing in healthcare systems is a paradigm shift that was not necessarily expected," Mr. Campobasso says. Although unexpected, private equity firms can benefit through these acquisitions by using their capital to develop hospitals and health systems into profitable organizations. "The idea is that [the firms] can deploy their equity investments in these operations, create critical mass by buying multiple facilities and create efficiencies that increase return on investment, put[ting] them in a position to, in a 5-10-year period, go back out and remarket and sell these assets for a significant profit," Mr. Campobasso says.
5. Reuse of buildings. Another alternative to financing hospital projects that is growing in popularity is reusing both existing on- and off-campus structures, according to Mr. Campobasso. "There's a lot more focus and emphasis on combining operational process improvement with retrofitting existing space [rather than] building new," he says. Mr. Campobasso predicts this trend will continue because it is an effective strategy hospitals can use to improve efficiency without putting more real estate on their balance sheets. "Take existing brick and mortar resources and get more efficiency and more throughput with some modification to the facility."
6. Shared space. In addition to repurposing current buildings, hospitals and health systems are sharing real estate with physician offices and other providers to both improve quality and reduce costs of expansion or renovations. "The traditional medical office buildings where physicians have their own business offices, waiting rooms, clinical areas — that paradigm is going to change and [you're going to] see more shared services. [This will] reduce real estate and facility cost at the same time it improves patient experience, reduces cost and improves quality of care," Mr. Campobasso says. Mr. Campobasso suggests buildings whose design supports clinical integration through shared space can also improve patient experience by increased access and better outcomes. "Whether there to see a physician and/or receive diagnostic services, it will be easier for the patient to move through the facility and receive care in a timely and very efficient basis."
Learn more about Navigant.
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