Transcript Slide 1

Capital Link
Region II Annual Conference
2010
Creating a Place for Healthcare Reform:
Understanding the Financial
Dang!
Opportunities
What’s in
this
ReformReform
stuff and
Healthcare
and how do I
get
somethe
of Financial
this phony
baloney
capital
Utilizing
Tools
to Complete
Your Building Project.
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!
2
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What is Driving Healthcare Reform?
3
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Making you Nervous
“Magellan circumcised
the earth.”
“With a 100 foot clipper.”
“His men were very nervous.”
4
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What We Will Look At
• The Driving Forces Assailing Us
• The Likely Impacts
• How CHCs Must Prepare
5
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Collision Course With
Two Certainties
That will overwhelm our
industry.
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Demographics of
an
Aging Population
Fragile Government
Programs
7
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Its far too late to avoid the collision.
HealthChange, LLC
2004-2005
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What Storm Will Hit
CHCs?
When 2/3 of voters are at or near
retirement age?
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Well, Some of You…Like Me…
Are
Part of the Problem!
So, let’s find out who.
10
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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 blackand-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.
12
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2. Who was on your first
lunchbox?
A. Davy Crockett
B. Vanilla Ice
13
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3. Do you remember Howdy
Doody?
A. Of Course
B. You’re making
that name up!
14
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4. Who was the first living
President you remember?
A. Dwight
Eisenhower
B. Vanilla Ice
15
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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.
17
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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.
19
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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
20
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What Transformed Society So
Quickly…& Why Is It
Important?
1. Great depression
No money
No buying
2. WWII
Earnings went unspent
unprecedented industrial build-up…and…
Women in the workplace
21
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After WWII
• Huge production capability
• Pent-up consumer spending
And…
• LOTS OF BABIES (targetable market)
And…
• Television
22
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Major Socio-Economic Shift
• Prior to WWII
– Production for needs
• Post WWII
– Production of needs
23
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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
24
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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
25
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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.
26
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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!
27
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So, What Is Driving
the Need for Healthcare Reform?
28
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The Demographic Pyramid
• The pyramid.
• The Chinese lantern
• The inverted pyramid
29
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1. The Huge Number of
Boomers
30
26.2
25
25
Millions
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Americans aged 80 and over vs. preschool
population
20
17.2
19.6
Over 80
Preschool
15
10
5
8.1
3.7
0
1970
1995
2040
31
U.S. Census data 1998
U.S. college-age youth (aged 18-21)
75.2
The elderly (aged 65 &over)
80
70
60
Millions
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When the elderly outnumber college-age youth by four
to one, America’s youth tradition may only by a memory
50
40
33.5
30
20
10
9.6 9
14
20.2
0
1940
Source: Census (1996)
1995
2040
32
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2. Increased Life Expectancy
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Longevity and the Science of
Aging
• 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?
34
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Number of Workers Per Retiree
5
5
4.5
4
4
3
3
2
2
1
0
1990
2000
2010
OECD - Organization of Economic Cooperation and Development
2020
2030
35
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What About Our Government
Programs?
Declaring War on the Future:
36
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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
2030!
37
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Healthcare as % of GDP
25%
25.00%
20.00%
15%
15.00%
10.00%
6%
5.00%
1900
1964
1994
2020
3%
0.00%
% of GDP
38
Social Security, Medicare , and Medicaid
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Outlays as a Percentage of GDP 1990-2075
24
22
20
18
16
14
12
10
8
6
4
2
0
1990
Social Security
Medicare
Medicaid
2000 2010 2020 2030 2040 2050 2060 2070
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
22
20
18
16
14
12
10
8
6
4
2
Baseline SS, Medicare, and Medicaid
Baseline receipts (includes JGTRRA)
Return to 2002
Continue at same rate
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
(As percent of GDP)
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
40
Budget, FY 2004.”
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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?
42
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The Three Financial Ages
• Borrowers: 20-40
• Investors: 40-60
• Divestors: 60+
43
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Percent of Adult Population
40 to 60 Years Old (Investors)
38%
36%
34%
32%
30%
28%
26%
% of Population
24%
22%
20%
1985
1990
1995
2000
44
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Dow Jones Industrial Average
12,000
10,000
8,000
6,000
DJIA
4,000
2,000
0
1985
1990
1995
2000
45
40%
38%
36%
34%
32%
30%
28%
26%
24%
22%
20%
% of Population
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
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Percent of Adult Population 40 to
60 years old (Investors)
46
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Dow Jones?
40%
38%
36%
34%
32%
30%
28%
26%
24%
22%
20%
19
% of Population
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
47
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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
One Year Ago
Rates Today
•
•
•
•
Fed Funds – 0%
TE Bond - .25%
Prime – 3.25%
Inflation - -2%
•
•
•
•
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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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?
Current (2009) Patients by
Payer Source
Post-Reform (2015)Patients
By Payer Source
Exchange
7%
Private
16%
Private
12%
Medicaid
34%
Uninsured
26%
Uninsured
39%
CHIP
2%
Medicare
8%
Other
Public
1%
Medicaid
42%
Other Medicare
Public
8%
1%
CHIP
4%
NOTE: Medicare patients will grow significantly
over 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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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 Forces
 Health 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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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
NMTC
State Funds
TE Bonds
Tax Bonds
Bank Loan
HRSA LGP
USDA
76
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Bank Loan
Conventional Bank Financing
• RFP for local or regional banks
• Loan application
• CRA
• LTV
• Financial forecast
• As Completed appraisal
• Underwriting
77
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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…..$8,000,000
Other……….….$2,000,000
Total…………….$10,000,000
Annual Debt Service………..$
562,032
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New Markets
Tax Credits
NMTC
• “Investment” that isn’t repaid
• 20% of total project cost
• Finding a Community
Development Entity (CDE)
• Application and awards
80
NMTC Hypothetical CHC Project
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Assumes $10 million
Bank or TE
Bond Debt
Equity Investor
$7.7 million
Equity investment ~
$3.3 million
$5.15 million in tax
credits (39% over 7 years)
NMTC Fund LLC
$11 million investment into CDE
CDE LLC
$10 million in loans
“A-1 Loan”: $7.7 million
“B Loan”: $2.3 million
Eligible CHC
Fees & Reserves ~$1 million
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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…..$8,000,000
NMTC….……….$2,000,000
Total…………….$10,000,000
Annual Debt Service………..$
480,000
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USDA
USDA
• Usable with other options
• Population 20,000 or under
• Loan guarantee 90%
• Direct Loan 4.5% for 40 years
• Application
• Feasibility analysis
85
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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…..$8,000,000
Other…………….$2,000,000
Total…………….$10,000,000
Annual Debt Service………..$
431,580
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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
TE Bonds
88
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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..…..$8,000,000
NMTC….……….$2,000,000
Total…………….$10,000,000
Annual Debt Service………..$
360,000
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Pooled TE Bond Issue
Single Bond Issue
$38.5 million
CHC
CHC
CHC
CHC
$7.7 mil.
$7.7 mil.
$7.7 mil.
$7.7 mil.
CHC
$7.7 mil.
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Taxable Bonds
Tax Bonds
•
•
•
•
•
With other options
With TE Bonds
NMTC
Any Investment Banking firm
Private Purchase (Non-profit
Foundations)
• Program Related Investments (PRI)
92
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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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Federally Guaranteed Capital Finance Structure for
CHCs
Forgivable Loan
NMTC
$2 million
Single Purpose Entity
$10 million
Loan
CHC Project
$10 million
Loan or Bond
Foundation
$8 million
Loan Guarantee
100% of $8 million
HRSA
Guarantee
80% of $10
million
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Taxable Bonds: HRSA LG and NMTC
Sources of Funds:
Tax Bonds....$8,000,000
NMTC….……….$2,000,000
Total…………….$10,000,000
Annual Debt Service………..$
280,000
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Remember the Conventional
Bank Loan?
Sources of Funds:
Bank Loan…..$8,000,000
Other……….….$2,000,000
Total…………….$10,000,000
Annual Debt Service………..$
562,032
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How Can I Qualify Financially?
98
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Financial Benchmarks
Profitability:
Liquidity:
Operating Margin
Current Ratio
Bottom Line Margin
Days in Net Patient
Receivables
Growth Rates:
Operating Revenue Growth
Rate
Days in All Receivables
Days in Accounts Payable
Days Cash on Hand
NPSR Growth Rate
Grants and Contracts Growth
Rate
Debt Capacity Ratios:
Operating Expense Growth
Rate
Debt Service Coverage
Leverage
99
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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 Margin
Change 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
Benchmark
Maintain Bottom Line Margin at 3% or
higher. The higher the margin, the
stronger the financial performance. 101
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Current Ratio
Total Current Assets
Total 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
102
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Days in Net Patient Receivables
Net Patient Accounts Receivable
Net Patient Service Revenue/ 360
Days
Measures Liquidity
The average number of days it takes
the health center to turn its patient
receivables into cash
Capital Link’s Recommended
Benchmark
Goal is to keep this ratio low! Maintain
Net Patient Receivables under 65-to-75
103
days
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Days in All Accounts Receivable
All 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
Capital Link’s Recommended
Benchmark
Goal is to keep this ratio low! Maintain All
Receivables turn under 60 days
104
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Days in Accounts Payable
Accounts 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
Capital Link’s Recommended
Benchmark
Goal is to keep this ratio low! Maintain
Payables under 60 days
105
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Days Cash on Hand
Cash + 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
investments
Capital Link’s Recommended
Benchmark
Maintain at least 30-to-45 Days Cash on
Hand
106
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Leverage Ratio
Total 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
Capital Link’s Recommended
Benchmark
Maintain Leverage Ratio of under 3.0:1
107
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Debt Service Coverage
Net 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
Capital Link’s Recommended
Benchmark
Maintain Debt Service Coverage Ratio of
1.25 or higher
108
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Next Steps
• Preliminary Feasibility Analysis
• Market Assessment?
• Space Planning?
• Comprehensive Financing
Assistance.
– 7 year Financial Forecast
– Obtaining financing
– Structuring financing.
Capital Link
Jerry Garcia (Grateful Dead)
Speaking for All Of Us…
“Somebody’s gotta do somethin’;
its just incredibly pathetic its
gotta be us!”
Capital Link
Terry Glasscock
Capital Link
[email protected]
781-789-6847