Capital Link Region II Annual Conference 2010 Creating a Place for Healthcare Reform: Understanding...

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Region II Annual Conference2010

Creating a Place for Healthcare Reform: Understanding the Financial

Opportunities in Healthcare Reform and

Utilizing the Financial Tools to Complete Your Building Project.

Dang! What’s this Reform stuff and how do I get some of this phony baloney capital

improvement money?!

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What We Will Learn Today?

• What is driving healthcare reform.• What lies ahead.• What the government is trying to do

about it.• And…what opportunities all this

creates for you to make capital improvements!

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What is Driving Healthcare Reform?

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Making you Nervous

“Magellan circumcisedthe earth.”

“With a 100 foot clipper.”

“His men were very nervous.”

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nk What We Will Look At

• The Driving Forces Assailing Us• The Likely Impacts • How CHCs Must Prepare

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nk Collision Course With

Two Certainties

That will overwhelm our industry.

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Demographics of an

Aging PopulationFragile Government

Programs

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HealthChange, LLC 2004-2005

Its far too late to avoid the collision.

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What Storm Will Hit CHCs?

When 2/3 of voters are at or near retirement age?

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nk Well, Some of You…Like

Me… ArePart of the Problem!

Well, Some of You…Like Me… Are

Part of the Problem!

So, let’s find out who.

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A Boomer Pop Quiz

Don’t worry…It’s multiple choice.

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1. Describe your first TV

A. It was a huge wooden cabinet with two big knobs and a teensy screen featuring a black-and-white picture the size of a cantaloupe that I barely saw because my dad was always standing in front of it adjusting the picture and saying bad words.

B. It was a Sony.

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2. Who was on your first lunchbox?

A. Davy Crockett B. Vanilla Ice

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3. Do you remember Howdy Doody?

A. Of Course B. You’re making that name up!

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4. Who was the first living President you remember?

A. Dwight Eisenhower

B. Vanilla Ice

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5. Did you own a whole batch of 45 R.P.M. records

that you wrote your name on the labels of and kept in a

carrying case with a handle and put little plastic inserts in the holes to play them?A. Yes B. Why did you

have to put little plastic inserts in the holes? 16

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6. Where were you when you first heard The

Beatles?A. In a station wagon

on the way to school.

B. In a fallopian tube.

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7. Have you ever experimented with drugs?

A. Uhhhh…no B. Uhhhh…no

Dave Barry Turns 50 18

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So, What’s the Big Deal About Baby Boomers

Getting Older and Why Should You Care?

Aging baby boomers are going to change healthcare drastically…and, if you are

going to survive, you need to understand why and how… because that is what is

driving healthcare reform.

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What Should We Know About the Baby Boomers?

• There are more of them.

• They will live much longer.

• But the overwhelming influence is that they have profoundly different life experiences and values.

• Why? Because society was completely transformed in

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What Transformed Society So Quickly…& Why Is It Important?

1. Great depression No moneyNo buying

2. WWIIEarnings went unspentunprecedented industrial build-up…and… Women in the workplace

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After WWII

• Huge production capability

• Pent-up consumer spending

And…

• LOTS OF BABIES (targetable market)

And…

• Television

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Major Socio-Economic Shift

• Prior to WWII

– Production for needs

• Post WWII

– Production of needs

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What About Shoes?

• 70% of all shoes sold are athletic shoes

• Less than 1/10 of 1% of people who wear them are athletes

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The MOONRIDERS

� Many of the current generation of elderly began life riding a horse

� 1930s - CHARACTER OF MODERN AMERICA

� 1940s - WWII the conscience of modern America

� 1950s - FAMILY PARADIGM

� 1960s - CIVIL RIGHTS REFORM and…

� Placed 12 men on the moon

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The Baby Boomers

� In 1958 I was 10 – Hoola Hoops, Fizzies

� In 1964 I turned 16.

� MUSTANG CONVERTIBLES.

� Then I went off to college

� THE PILL.

� A few years ago I turned 50..

� VIAGRA.

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Boomers…• More of us…live much longer…

• Everything we ever wanted was there before we knew we wanted it!

• Wants have become needs

• Needs have become expectations

• Expectations have become demands

• In other words… we’ve got an attitude!

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nk So, What Is Driving

the Need for Healthcare Reform?

So, What Is Drivingthe Need for Healthcare

Reform?

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The Demographic Pyramid

• The pyramid.

• The Chinese lantern

• The inverted pyramid

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1. The Huge Number of Boomers

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U.S. Census data 1998

Americans aged 80 and over vs. preschool population

26.225

1970 1995 2040

Over 80

Preschool

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9.6 914

1940 1995 2040

U.S. college-age youth (aged 18-21)The elderly (aged 65 &over)

When the elderly outnumber college-age youth by four to one, America’s youth

tradition may only by a memory

Source: Census (1996)

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2. Increased Life Expectancy

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• 1900 – 47 years.

• 1930s – under 60 years. (Social Security)

• 2010 – +/- 80 years.

• 2020 – 100 years.

• 2100 – 160? (100 years of retirement?).

• In fact, life expectancy is now increasing faster than people age. (Healthy women?)

• Implications for workers and their patients?

Longevity and the Science of Aging

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Number of Workers Per Retiree

1990 2000 2010 2020 2030

OECD - Organization of Economic Cooperation and Development35

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Declaring War on the Future:

What About Our Government Programs?

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Crisis?

• Congress’ own Commission on

Entitlement Reform reported that SS,

Medicare and interest on the national

debt will exceed all federal income by

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10.00%

15.00%

20.00%

25.00%

% of GDP

1900196419942020

Healthcare as % of GDP

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MedicaidMedicare

1012141618202224

1990 2000 2010 2020 2030 2040 2050 2060 2070

Social Security

Social Security, Medicare , and Medicaid Outlays as a Percentage of GDP

1990-2075

Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003. Based on data from the Congressional Budget Office, “A 125-Year Picture of the Federal Government’s Share of the Economy, 1950-2075,” July 3, 2002, table 2.

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Federal Receipts vs. Entitlement Spending

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Baseline SS, Medicare, and Medicaid

Baseline receipts (includes JGTRRA)

Return to 2002Continue at same rate

Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003 Based on data from Budget of the U.S. Government, FY 2004 and CBO’s “Analysis of the President’s

Budget, FY 2004.”

(As percent of GDP)

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3. Financial Crisis?

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What About Our Affluence?

• Median net worth of a family headed by a 50-year old baby boomer? (not counting house)

• Half the families in the U.S. – net worth less than $1000

• Stock Market?

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The Three Financial Ages

• Borrowers: 20-40

• Investors: 40-60

• Divestors: 60+

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Percent of Adult Population40 to 60 Years Old (Investors)

1985 1990 1995 2000

% of Population

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Dow Jones Industrial Average

10,000

12,000

1985 1990 1995 2000

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Percent of Adult Population 40 to 60 years old

(Investors)

20%22%24%26%28%30%32%34%36%38%40%

% of Population

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Dow Jones?

20%22%24%26%28%30%32%34%36%38%40%

% of Population

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nk So What Does this Mean

For You?

Its not just what you should do but why you should do it!

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In truth, there has never been a better time to initiate a capital

project.

Nor will there likely be a better time in your lifetime.

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#1. Interest Rates

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Interest Rates

Rates Today

• Fed Funds – 0%• TE Bond - .25%• Prime – 3.25%• Inflation - -2%

One Year Ago

• Fed Funds – 3.00%

• TE Bond -4.5%• Prime – 5.0%• Inflation – 4%

I’ll bet you won’t see lower interest rates in your life time

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#2. Fiscal Policy

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Fiscal Policy

• ARRA • Healthcare Reform Capital

Funds• NMTC – extra $3 billion • USDA – extra $1 billion

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#3. Building Costs

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Building Costs

• Inflation rate - -2%• Construction bids – 10% to

30% under budget• Building sales prices down 10%

to 20%• Lease and build-out?

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Window of Opportunity

• Lowest Interest rates• Federal and state stimulus

funding• NMTC• Stagnated building costs• Postponed budget cuts

(Medicare and Medicaid)

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nk This opportunity will not come

again.If you will require capital improvements

anytime in the next 10 - 15 years at least…you had

better

Do It Now

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Health Reform and Health Centers

So how does health reform fit in to this window of opportunity?

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Funding Levels

• New Funding for Health Centers: – $11 Billion over 5 years over and above the

$2.2 billion in annual CHC funding – $9.5 billion for CHC operations under Sect. 330– $1.5 billion for Capital over 5 years

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Health Reform – Funding Growth Chart

* Does not include $1.5B for capital projects

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Health Reform: What Might It Mean?

• Access to plenty of funding to grow and expand– Unclear how new funding will be distributed– Managing growth will continue to be a challenge– Need for organized state-wide planning will be paramount

• Recruiting staff – especially clinical staff – will be a challenge

– NHSC will need to be marketed MUCH more aggressively– ALL health centers need to increase involvement in training of ALL

levels of needed clinical professionals

• Facility space and equipment will also be a major challenge

– Physical capacity building critical– Adequate and attractive space needed

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Health Reform: What Will It Mean?

Uninsured39%

Medicaid34%

Private16%

CHIP2%

Medicare8%Other

Public1%

Uninsured26%

Medicaid42%

Private12%

CHIP4%

Medicare8%

OtherPublic

Exchange7%

Current (2009) Patients byPayer Source

Post-Reform (2015)PatientsBy Payer Source

NOTE: Medicare patients will grow significantlyover the next 10 years

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So What Didn’t Happen?• Cost containment still a challenge

(ENTITLEMENTS!)

• Existing Annual Appropriations Not Guaranteed

• Although bill is paid for, cuts happen later

• “Capital Tools” not included – LGP running out– $10.5B to reach 30 million patients (only $3B

available)

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What We Don’t Know About Capital Funds

• How allocated over the 5 years– Front loaded?

• Award criteria and process– FIP?– “Down Payment?”– New application process

• Geography• Rural v. Urban

• Timing– Wait for it?

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You Need a Plan

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nk Whew! So What’s Next?

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Our world just got faster …Health centers (and PCAs) will be

pressured like never before to respond to opportunities for growth

Most of the funding will be for operations, not capital

The stakes will be high

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Funding for capital projects will continue to be challenging There will be some grant funding, but not enough There will be bitterness and frustration among the

have-nots as a result On the debt side, the difficult lending environment

is here to stay for the foreseeable future; interest rates will head higher

NMTC will continue to be in short-supply and leverage loans will remain challenging

And meanwhile the pressure to open new sites, expand, etc. will be very high

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The Dilemma for Health Centers: Paralysis or Action?

Paralyzing ForcesHealth centers will feel caught between

the ongoing fiscal challenges at the state level and the imperatives for growth at the federal level

There will be “confusing noise” in the market

Grant cycle mentality

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The Dilemma for Health Centers: Paralysis or Action?

• Action-Oriented Forces– Mission Imperative: More resources

than ever before directed toward health centers will enable huge strides toward meeting community needs.

– Risks of inaction are high: “If I don’t move ahead now, I will be left behind”

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“Opportunism” vs “Making Your Own Opportunities”

Opportunism = Passive “The Feds are going to give away $1.5 Billion for capital

projects; let’s see what happens”

Making Your Own Opportunities = Active What communities do we want to be serving in five years

and what do we need to be doing between now and then to get there?

How do we align our strategic goals with funding opportunities that may (or may not) emerge?

How will we meet our goals in either case?

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Who will succeed? Successful centers will be the ones who are

willing to take risk in an uncertain environment and who have a well-founded plan to manage the downside risk (ACTIVE)

The need for rapid growth will likely advantage health centers that have already achieved a certain level of scale.

Active smaller centers that are less sophisticated will also be trying to get in the game

Passive centers will not succeed

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What are the implications for an active vs. passive

approach? The size, scale, frequency and complexity

of health center capital projects will likely continue to grow

The growing sophistication of the capital process will be necessary to succeed.

The pressure for speed and a high level of technical knowledge will continue to grow.

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nk Financing is Key: How do

you get it?

You need to assemble your “financial Legos”

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Financing Components

HC Reform

Grants/Gifts

State Funds

TE Bonds

Bank Loan

HRSA LGP

USDA 76

Tax Bonds

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nk Conventional Bank

Financing• RFP for local or regional banks• Loan application• CRA• LTV• Financial forecast• As Completed appraisal• Underwriting

Bank Loan

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Conventional Bank Loan• Loan 80% of project value -

$8,000,000• Interest rate 6.5% with 25 year

amortization• Where will the remaining

$2,000,000 come from?– Sale of existing building?– Hospital?– State? – Capital Campaign?– HC Reform?

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Conventional Bank Loan

Sources of Funds:

Bank Loan…..$8,000,000Other……….….$2,000,000Total…………….$10,000,000

Annual Debt Service………..$ 562,032

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New MarketsTax Credits• “Investment” that isn’t repaid• 20% of total project cost• Finding a Community

Development Entity (CDE)• Application and awards

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NMTC Hypothetical CHC ProjectAssumes $10 million

Equity Investor

CDE LLC

Equity investment ~ $3.3 million

Eligible CHC

Fees & Reserves ~$1 million

NMTC Fund LLC

$11 million investment into CDE

$10 million in loans

Bank or TE Bond Debt

“A-1 Loan”: $7.7 million“B Loan”: $2.3 million

$7.7 million

$5.15 million in tax credits (39% over 7 years)

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When Can NMTC Be Used

• Qualified census track• Willing lender• Investor• With TE bonds or bank loan• USDA

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Bank Loan: HRSA Guarantee and NMTC

• NMTC investment approximately 20% of project cost - $2,000,000

• Bank loan for the balance - $8,000,000 interest only for 7 years

• Interest rate with HRSA LG – 6%• No need for additional financing

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Bank Loan: HRSA LG and NMTC

Sources of Funds:

Bank Loan…..$8,000,000NMTC….……….$2,000,000Total…………….$10,000,000

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USDA• Usable with other options• Population 20,000 or under• Loan guarantee 90%• Direct Loan 4.5% for 40 years• Application• Feasibility analysis

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USDA Direct Loan Structure• Loan will be 80% of project Cost -

$8,000,000.• Roughly 4.5% interest rate with 40

year amortization.• Where will the remaining

$2,000,000 come from?– Sale of existing building?– Hospital?– State? – Capital Campaign?– FIP or CIP?

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USDA Direct Loan

Sources of Funds:

USDA Loan…..$8,000,000Other…………….$2,000,000Total…………….$10,000,000

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Tax Exempt Bonds• With other options• NMTC• Taxable Bonds• State issuing authority• LOC from bank• Private Purchase• Interest rate• Bond Pool 88

TE Bonds

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Tax Exempt Bonds and NMTC• NMTC investment approximately 20% of

project cost - $2,000,000• TE Bonds for the balance - $8,000,000

interest only for 7 years• Interest rate – 4.5%• No need for additional financing

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Bank Loan: HRSA LG and NMTC

Sources of Funds:

TE Bonds..…..$8,000,000NMTC….……….$2,000,000Total…………….$10,000,000

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nk Single Bond Issue

CHCCHCCHC CHC CHC

$38.5 million

$7.7 mil. $7.7 mil. $7.7 mil. $7.7 mil. $7.7 mil.

Pooled TE Bond Issue

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Taxable Bonds• With other options• With TE Bonds• NMTC• Any Investment Banking firm• Private Purchase (Non-profit

Foundations)• Program Related Investments (PRI)

Tax Bonds

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Taxable Bonds and NMTC• NMTC investment approximately 20% of

project cost - $2,000,000• Taxable Bonds for the balance -

$8,000,000 interest only for 7 years• Interest rate – 3.5%• No need for additional financing

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How in the world can you get such a low

interest rate?• Use the HRSA LGP to provide a

100% federal guarantee• Fund at least 20% of the

project with NMTC or grants• Have TE foundation provide the

funds as a Program Related Investment.

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NMTC$2 million

Single Purpose Entity$10 million

Foundation$8 million

CHC Project$10 million

HRSA Guarantee80% of $10

million

Loan or Bond

Loan Guarantee100% of $8 million

Forgivable Loan

Federally Guaranteed Capital Finance Structure for CHCs

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Taxable Bonds: HRSA LG and NMTC

Sources of Funds:

Tax Bonds....$8,000,000NMTC….……….$2,000,000Total…………….$10,000,000

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Remember the Conventional Bank Loan?

Sources of Funds:

Bank Loan…..$8,000,000Other……….….$2,000,000Total…………….$10,000,000

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nk How Can I Qualify

Financially?

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Financial Benchmarks

Profitability:

Operating Margin

Bottom Line Margin

Growth Rates:

Operating Revenue Growth Rate

NPSR Growth Rate

Grants and Contracts Growth Rate

Operating Expense Growth Rate

Liquidity:

Current Ratio

Days in Net Patient Receivables

Days in All Receivables

Days in Accounts Payable

Days Cash on Hand

Debt Capacity Ratios:

Leverage

Debt Service Coverage

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Operating Margin Change in Net Operating Assets

Total Operating Revenue

Measures Profitability

The percentage of operating revenue that the health center retains as profit (or loses) from operations.

Capital Link’s Recommended Benchmark

Maintain Operating Margin at 1% to 3% or higher. The higher the margin, the stronger the financial performance. 100

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Bottom Line MarginChange in Net Assets

Total Operating Revenue

Measures Profitability

The percentage of operating revenue that the health center retains as profit (or loses) from all business activities.Capital Link’s Recommended

BenchmarkMaintain Bottom Line Margin at 3% or higher. The higher the margin, the stronger the financial performance. 101

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Current RatioTotal Current AssetsTotal Current Liabilities

Measures Liquidity

How many times the health center can cover its current obligations (due within one year) with current resources.Capital Link’s Recommended

Benchmark

Maintain Current Ratio of 1.25:1 or higher

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Days in Net Patient Receivables

Net Patient Accounts ReceivableNet Patient Service Revenue/ 360 Days

Measures Liquidity

The average number of days it takes the health center to turn its patient receivables into cash

Goal is to keep this ratio low! Maintain Net Patient Receivables under 65-to-75 days

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Days in All Accounts ReceivableAll Receivables

Patient + Grant receivables + Net Assets Released from Restrictions/ 360 Days

Measures Liquidity

The average number of days it takes the health center to turn all its receivables into cash

Goal is to keep this ratio low! Maintain All Receivables turn under 60 days

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Days in Accounts PayableAccounts Payable

(Total Operating Expenses minus Salaries and Depreciation) / 360 Days

Measures Liquidity

The average number of days it takes the health center to pay its suppliers

Goal is to keep this ratio low! Maintain Payables under 60 days

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Days Cash on HandCash + Short-Term Investments

(Total Expenses - Depreciation)/360 Days

Measures Liquidity

How many days the health center can cover its daily operating expenses with its current level of cash and investmentsCapital Link’s Recommended

BenchmarkMaintain at least 30-to-45 Days Cash on Hand

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Leverage RatioTotal Liabilities

Net Assets

Measures Financial Condition and Risk

Compares the amount of the health center’s resources that are owed (to vendors, creditors, employees) to those that are internally financed from equity sources

Maintain Leverage Ratio of under 3.0:1

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Debt Service CoverageNet Income + Depreciation + Interest Expense

Principal Payment + Interest Expense

Measures Ability to Repay Debt

How may times the health center can cover its yearly debt principal and interest payments with cash generated from operations

Maintain Debt Service Coverage Ratio of 1.25 or higher

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Next Steps

• Preliminary Feasibility Analysis• Market Assessment?• Space Planning?• Comprehensive Financing

Assistance.– 7 year Financial Forecast– Obtaining financing– Structuring financing.

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nk Jerry Garcia (Grateful Dead)

Speaking for All Of Us…

“Somebody’s gotta do somethin’; its just incredibly pathetic its gotta

be us!”

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Terry GlasscockCapital Linktglasscock@caplink.org781-789-6847

Capital Link Region II Annual Conference 2010 Creating a Place for Healthcare Reform: Understanding...

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