Hos­pi­tals hun­gry for re­turn of in­cen­tives for bor­row­ing

Modern Healthcare - - Front Page - Me­lanie Evans

Build Amer­ica Bonds, the tem­po­rary fi­nanc­ing op­tion that helped lower debt costs for health­care bor­row­ers be­fore it ex­pired in De­cem­ber, en­joy the en­dorse­ment of the pres­i­dent, who would re­vive the bonds if he could. But hos­pi­tals are mov­ing to res­ur­rect other nowde­funct credit pro­grams.

Pres­i­dent Barack Obama, in his bud­get re­leased mid-Fe­bru­ary, called for the pop­u­lar Build Amer­ica Bond pro­gram to be re­in­stated, with a few changes. The Amer­i­can Hos­pi­tal As­so­ci­a­tion and the Na­tional As­so­ci­a­tion of Health and Ed­u­ca­tional Fa­cil­i­ties Fi­nance Authorities—which bring hos­pi­tal bonds to mar­ket—will seek to re­store bank in­cen­tives to buy tax-ex­empt bonds and al­low hos­pi­tals to en­ter mar­kets with the strong credit sup­port of the Fed­eral Home Loan Banks sys­tem, of­fi­cials said.

Congress en­acted the short-lived pro­grams to boost credit ac­cess as the hous­ing melt­down claimed banks and in­sur­ers that will be ad­dressed, if at all,” he said in an e-mail. The first, com­monly de­scribed as the bankqual­i­fied pro­vi­sion, ex­panded cer­tain tax de­duc­tions for banks that buy tax-ex­empt bonds. Banks could deduct some in­ter­est ex­pense for up to $30 mil­lion of bank-qual­i­fied bonds per bor­rower un­der the Amer­i­can Re­cov­ery and Rein­vest­ment Act. Pre­vi­ously, the limit was $10 mil­lion per bond is­su­ing au­thor­ity—such as cities, coun­ties or state agen­cies that bring bonds to mar­ket for mul­ti­ple bor­row­ers. Bank-qual­i­fied deals to­taled $36.7 bil­lion in 2010, up from $15.2 bil­lion in 2008, ac­cord­ing to Thom­son Reuters.

An­other pro­vi­sion al­lowed tax-ex­empt bonds to to­tal up to 2% of bank as­sets, giv­ing banks fur­ther in­cen­tive to lend to not-for­profit bor­row­ers.

Michael Tym, a di­rec­tor with Pon­der & Co., said the de­duc­tions im­proved credit ac­cess for small hos­pi­tal bor­row­ers. Banks con­tinue to lend to hos­pi­tals, but not to the same de­gree or as cheaply as be­fore, he said. sys­tem. Slightly more than half the bonds to­taled $10 mil­lion or less. Hos­pi­tals and other health­care bor­row­ers lagged be­hind other sec­tors that took ad­van­tage of the tem­po­rary ac­cess to credit sup­port, ac­count­ing for 31 of the 187 bond deals with Fed­eral Home Loan Banks guar­an­tees un­der the pro­vi­sion. In to­tal, the Fed­eral Home Loan Banks sys­tem ex­tended its credit to roughly $4.6 bil­lion in debt.

But it wasn’t only small bor­row­ers that took ad­van­tage of the credit re­lief.

David Singleton, se­nior vice pres­i­dent, trea­surer and chief in­vest­ment of­fi­cer for Ad­ven­tist Health Sys­tem, said the sys­tem re­lied on the pro­grams to weather up­heaval from the credit cri­sis and im­prove bor­row­ing costs.

The Win­ter Park, Fla.-based sys­tem used back­ing from the Fed­eral Home Loan Bank of Atlanta af­ter in­ter­est rates climbed on $740 mil­lion in short-term debt backed by a slip­ping com­mer­cial bank, Singleton said. “It’s ab­so­lutely an ex­pense you feel,” he said. The Atlanta Home Loan Bank sup­port helped lower rates un­til Ad­ven­tist could re­fi­nance.

Ad­ven­tist also took ad­van­tage of the pro­vi­sion that al­lows banks to hold 2% of its as­sets in tax-ex­empt bonds to re­fi­nance $357 mil­lion with a di­rect bank loan. The deal re­fi­nanced debt from a three-hos­pi­tal sys­tem Ad­ven­tist ac­quired in Septem­ber and sig­nif­i­cantly re­duced the in­ter­est rates, thanks to the pro­vi­sion and be­cause Ad­ven­tist agreed to pay off the 20-year bonds in 10 years or less.

Singleton said a re­cent sharp rise in rates un­der­scores the need for such pro­grams to be con­tin­ued. “I don’t be­lieve the cri­sis is over,” he said.

The end of Build Amer­ica Bonds is one cul­prit be­hind the re­cent rise in tax-ex­empt in­ter­est rates, ac­cord­ing to an­a­lysts and health­care fi­nance ex­perts (Feb. 14, p. 12). Obama en­dorsed ex­pand­ing the bond op­tion to in­clude pri­vate not-for-prof­its, in­clud­ing hos­pi­tals. Un­der the Re­cov­ery Act, gov­ern­ments—states, cities, coun­ties—could is­sue the tax­able bonds and re­ceive a fed­eral sub­sidy cov­er­ing 35% of the tax­able bor­row­ing costs. The pres­i­dent’s bud­get pro­posed re­duc­ing the sub­sidy to 25%. A bill in­tro­duced in early Fe­bru­ary would ex­tend Build Amer­ica Bonds for two years with in­cre­men­tally smaller sub­si­dies of 32% this year and 31% in 2012.

But the bonds’ re­vival could meet with pow­er­ful op­po­si­tion. Dave Camp (R-Mich.), chair­man of the House Ways and Means Com­mit­tee, has been sharply crit­i­cal of the bonds, say­ing they “sim­ply sub­si­dized state and lo­cal gov­ern­ments go­ing deeper into debt.”

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