Thomas R. Green, CEO of Columbus, Ohio-based investment firm Lancaster Pollard recently discussed financing capital projects with Healthcare Finance News Editor Rene Letourneau.
Q: What are the main reasons why hospitals should consider new construction and major renovation projects?
A: To prosper and grow, hospitals are continually evaluating their markets and repositioning themselves to be current with the latest technology, newest treatment modalities and a changing diverse population. For example, 60 years ago, hospitals, on average, were dealing with mostly homogenous populations, as well as adding maternity wards to meet skyrocketing birth rates. Today a greater focus is meeting the needs of increasingly diverse populations and aging baby boomers.
It's imperative for hospitals to evolve with the times and be relevant to its stakeholders. To do that, hospitals need up-to-date facilities and equipment. 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.
Q: How has the poor economy changed the capital financing environment in recent years?
A: A result of the downtown in the economy is today's extraordinarily low interest rates, which mean a lower cost of capital for hospitals to fund projects. 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. 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.
Q: What is your best piece of advice for hospital CEOs/CFOs looking to finance a construction or renovation project?
A: Consider all your financing options. 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. 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.