As hospitals and health systems launch construction projects and refinance debt in order to remain competitive in the marketplace, they should be considering all their capital financing options, said Thomas R. Green, CEO of Columbus, Ohio-based investment firm Lancaster Pollard.
According to Green, healthcare leaders looking to finance a capital project should examine all available options because times have changed.
“What was the best way to finance a capital project in the past may not be the optimal structure to finance your hospital’s current project or refinance its existing debt,” he said. “Prudently managing access to capital requires that the hospital and their investment banker integrate the organization’s financial plans with its long-term strategic plans. Whether your hospital chooses to build, renovate or refinance, its plans and credit strength will determine its financing options.”
The weak economy has made financing capital projects less expensive, said Green.
“A result of the downtown in the economy are today’s extraordinarily low interest rates, which mean a lower cost of capital for hospitals to fund projects,” he said. “If a hospital is planning a new construction or a renovation project or if they are looking to refinance outstanding indebtedness, these historically low interest rates are providing some additional incentive to move forward with those projects.”
“The collapse of the capital markets in 2008 also caused a change to traditional financing structures,” he added. “Some were virtually eliminated or are much less popular like bond insurance and bank letters of credit. It also gave rise to other structures, like HUD/FHA Section 242 mortgage insurance and private placements of debt directly into bank investment portfolios.”
Making smart capital investment choices is crucial for hospitals and health systems looking to strengthen their revenue streams and remain viable in a market plagued by decreasing reimbursements and tighter margins.
“It’s imperative for hospitals to evolve with the times and be relevant to their stakeholders. To do that, hospitals need up-to-date facilities and equipment,” said Green. “New construction and major renovation projects can lead to better physician recruitment and retention, improved services and increased community awareness and perception - key factors in maintaining and increasing revenues.”
[See also: Controlling construction costs]