Financing Critical Access Hospitals: Navigating the Complexities

When it comes to Critical Access Hospital projects, two themes reign supreme: affordability and strategic thinking. Working on these projects means getting creative in figuring out how to fine-tune design for a community's unique needs, maintaining the highest standards of planning and execution while balancing tight budgets.

Hosted by: 
Matt Gerstner - BWBR Podcast Host and Producer

Guests:
Brad Krump - BWBR, Principal and Director
Nick Smith - Wipfli, Principal

Music provided by Artlist.io
Siberian Summer by Sunny Fruit
DuDa by Ian Post

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Transcript

Matthew Gerstner  00:10

This is site of design from BWBR a podcast discussing all aspects of design with knowledge leaders from every part of the industry. 

Matthew Gerstner  00:19

Hello, and welcome to sight of design from BWBR. I'm Matt Gerstner, your host for this episode. On this episode, we'll be talking about some unique opportunities faced by critical access hospitals, specifically around funding, which can be a particular challenge given their rural locations, and often limited resources. Today, we're joined by Wipfli, Principal, Nick Smith, and BWBR Healthcare principal, Brad Krump, to talk about what options hospitals have, and how to navigate these complex decisions and processes. Brad, Nick, thanks for joining us today.

Brad Krump  00:53

Thanks, Matt.

Matthew Gerstner  00:54

So, just to give our listeners a little bit of background, I thought maybe it would be nice if each of you introduce yourselves a little bit and tell them a little bit about yourselves. Nick, you want to get started?

Nick Smith  01:04

Sure. So Nick Smith, principal at Webfleet. We're a top 20 accounting CPA and consulting firm. I'm based out of the Twin Cities office, but work nationally. I've been doing this for about 20 years now helping critical access hospitals, plan and finance major building projects. I'd like to say one of my first projects as a healthcare consultant was actually alongside BWBR on a large replacement hospital planning project. So that was kind of fun.

Matthew Gerstner  01:32

 Fantastic. Fantastic. Thank you. Thanks for joining us today, Nick, I know you're gonna bring a wealth of information to the conversation. And Brad, how about you, would you like to tell our listeners a little bit more about yourself today?

Brad Krump  01:42

I've been a principal at BWBR for 27 years.  I have a passion in helping CAH clients because I was born and raised in a small town in North Dakota.  I have a lot of relatives that still live in rural America and it reminds me of the importance of healthcare.  I don’t think twice about the healthcare available to me; but they do not take it for granted as it is a source of community pride.  For this reason, I love to assist local community hospitals around the region and around the country. It's so rewarding to work with critical access clients and create their new facility.

Matthew Gerstner  02:10

Well, Brad, I've gotten the opportunity to work with you over the years, and I know your brand has a wealth of knowledge as well. And so I'm really looking forward to having this conversation together today with both of you. So I'll just get things started here. So I'm wondering, what are the challenges and opportunities involved in financing a major renovation or replacement critical access hospital, I mean, I know it can be a big thing. 

Nick Smith  02:32

You know, when it comes to the challenges and opportunities of financing a major project, or a small hospital is we like to we like to say it's a once in a lifetime, it can be a once in a lifetime project, that cost associated with a major building project is oftentimes one of the biggest challenges. So really affordability, and also alongside that what to build. It's also an opportunity to kind of rethink how you do business. So are we as a hospital in the right services? Should we be thinking about adding services? You know, how we offer care, oftentimes, we're kind of shoehorned into the existing facility that we operate in that could have been built 50-60 years ago for a different time and healthcare. And so it's really a chance to rethink that. But to do so practically and affordably. And to make sure that we're we're planning to what the community needs. 

Brad Krump  03:33

Yeah. And to just piggyback on to what Nick said, you know, construction costs five years ago, for replacement facility were in the $300 to $400 range in the Upper Midwest region. In today's world, we're pushing $600+. And so that delta in cost and the rapid escalation in prices, for materials as well as labor really causes a challenge for clients today. Resources are limited. So, you know, financing becomes a really important option for what you need to do. 

Matthew Gerstner  04:11

It's really interesting. I know, we've all seen escalation in pricing. I know we've all seen escalation in cost of goods in general, you know, as with inflation rates, what they are, and so I find it fascinating that we've seen almost a doubling as you mentioned Brad, in the cost per square foot of what it's costing to actually build or renovate these, these hospitals out in rural areas. 

Brad Krump  04:33

Yeah, Matt, it's challenging because, you know, just keeping a hospital open, you know, these these Hill-Burton facilities that that are 50 to 60 years old, becomes a challenge because there's certain items that are at the end of life, the boilers, the chillers, the air handling units, the electrical service. Even items such as benign as a as a nurse call system When, when you get into that age, I've heard of clients that are buying parts on eBay, when they have downtime, because they can't afford to replace the entire unit. So they're really looking at what is the most cost effective way of doing it. And sometimes it is really doing the old MacGyver in trying to figure out how to piece it together to keep things running.

Nick Smith  04:56

I mean, I would add on that, you know, it's not just escalation that we've seen in construction costs, I mean, the critical access hospitals that we work with, are facing inflation across the system when it comes to the labor that they pay for nurses, medical staff, the equipment that they purchase the supplies that they purchase. So they're facing inflation in just their everyday operations. But then also, you know, when it comes to reimbursement, it just hasn't caught up, it hasn't kept pace with inflation. So they're facing rising costs, rising costs of building, and kind of more of a stagnant, I would say, reimbursement mechanism. So it really kind of stretches the dollar of what you can afford out to the max.

Matthew Gerstner  06:12

You bring up a really good point there, Nick, the inflation. Today, we're not just talking about the hospital and what it costs to build the hospital. It's affecting everybody, it's affecting the people out these locations as well, which then is being reflected in salaries, and it's coming back to the hospital. And I can see that being extremely challenging as they're looking to make every dollar count, especially as you mentioned, the reimbursable is just not keeping up. So thinking about all that what financing options are available, you know, and what are the major considerations of each as hospitals are looking to do these kinds of projects?

Nick Smith  06:49

That's one of the first questions that always comes up when when we're talking about financing a major building project is how do we want to pay for it. And so, you know, I like to say cash is king. You know, first we look at what cash they have available. And you know, a lot of times there isn't a lot of cash available to a lot of these smaller hospitals. But some have started squirreling away for that rainy day fund for knowing that they were eventually going to think about doing a major building project or a replacement hospital. So you know, they might have a good amount of cash available to help put towards a project. But that's never gonna cover the full cost of doing a major building project. So then you start having to look much like when we're building a house or buying a house, look at a mortgage, we look at financing options. USDA is the federal government's Facilities Loan Program, geared specifically towards rural facilities like rural hospitals, that becomes a very strong contender for a financing source. But there's other options as well, such as HUD financing, or conventional private financing, bonds or municipal bonds to help cover the cost of a major building project. But then you got to look outside those traditional sources of funding and say, you know, what grants might be available to us? Are their federal grants or their state grants that could help cover some of the costs. And then of course, there's philanthropy, a lot of times the community will step up to help support a major building project, because they recognize that a lot of times the lifeblood of the community is, frankly, the hospital. And so that becomes important as well as if you have a mechanism for tax or community levy that becomes a vehicle for helping finance project as well.

Brad Krump  08:36

USDA has been probably one of the most used vehicles. For BWBR critical access replacement facilities. We have 10 USDA financed hospital replacements. And we have 4 currently in process. And there are some great benefits that come along with USDA financing. But there's also some restrictions and challenges that also come with it.

Matthew Gerstner  09:02

Can you give us a quick summary on what USDA financing is and why it's unique? 

Nick Smith  09:07

Yeah, I can help with that. So you know, Wipfli we've been working and partnering with USDA to help our clients afford major building projects for really since the start up or the existence of of USDA since it kind of formed up and basically the purpose of USDA, so people think USDA, US Department of Agriculture, what does that have to do with hospitals? But really, the USDA community facilities program offers direct loans, loan guarantees, and grants to help develop or improve essential public services and facilities in communities across rural America. Really, that's what they're about is helping to fund community facility projects in rural America. And when you think about community facility projects in rural America, you've really got hospitals, schools, and emergency services like fire stations, police stations, things like that. And so USDA recognizes I think that that affordability is a big issue for major building projects in rural areas for small hospitals. And so they offer very favorable financing programs. Some of the lowest, really the lowest interest rates that you'll be able to find nationally for replacement hospital right now, the interest rate for replacement hospital financed is about 3.875%. 

Matthew Gerstner  10:33

Oh wow! 

Nick Smith  10:34

And that's fixed over, you know, a payback period of 30 to 40 years. So the financing terms are very favorable to rural hospitals. But you know, the USDA program requires an application process, it can be a lengthy application process. There's a lot of hurdles and qualification steps to jump through things like does the hospitals sit on wetlands? You know, what is the makeup of the board of directors? What are the historical financials look like for the hospital? There's a lot of details that need to be ironed out during the application process. But yeah, by far, it is the most common and most favorable, financially available financing program for rural hospitals. 

Brad Krump  11:16

USDA is is a great way in regards to the terms and the duration of the loans. As Nick mentioned, there's a lengthy process. One of the first steps once we begin design is preliminary architectural report, which is more than just the architectural. It includes some of the financing as well. But certainly, as Nick mentioned, investigating wetlands, and a new piece of property is important. It also looks at endangered species, it looks at the age of the existing facility, and what challenges are there and what costs are associated with making those updates. And then gets into what are you thinking about in regards to designing a new facility? What components are in it? What size is it? What are the soft costs as well as the construction costs. So it becomes a really in depth report, done early in the process. It is one of those early steps in USDA approval process

Nick Smith  12:15

Alongside the preliminary architecture or, you know, the USDA requires what's called an examined financial forecast. Or we'd like to call it a financial feasibility study. And really, any project of the size and magnitude of a replacement hospital or a large renovation is going to require an examined financial forecast must be performed by a qualified CPA firm like a Wipfli. Again, we've been doing this for many years. And that is really a five year projection of what the income statement, balance sheet, statement of cash flows is all going to look like prospectively once we layer on some level of debt. So that is what will give USDA as a lender, the peace of mind that this project is affordable and sustainable for the organization for the community, so that they can help fund it. But before the preliminary architectural report, or the feasibility study even comes into play, we typically recommend you know that the hospital do kind of a more high level portability analysis to understand what they might potentially be able to afford. And oftentimes Brad and the team at BWBR at the same time are are doing a facility master plan, looking at kind of what what needs to happen from facility perspective. And then if you're thinking about USDA, there's a pre-application process and I always say start interfacing and talking to your local USDA rep. As soon as possible, you know, just let them know, Hey, we're looking at doing this, you know, what are the what are the requirements? Would it be good for us to apply? And there is a pre application process that occurs before the full application submittal. And that really just makes sure that you you check the basic boxes that your qualified applicant you have the ability to apply and

Matthew Gerstner  14:08

What kind of instances would disqualify an applicant in those situations?

Nick Smith  14:13

There's a few things that would potentially disqualify you right out of the bat. First and foremost, are you rural? Also, there's a couple of things; You obviously have to be registered as a as a hospital. So you have to find your Articles of Incorporation and things like that to prove that you are in fact, an incorporated hospital. And you need to have a local board of directors, which is not a hurdle for for most of our critical access hospital clients, but again, thinking about your board makeup, if you have a board of directors that really doesn't reflect the community that's being served, that could be a potential issue for USDA qualification. One tip that I always give to hospitals that are thinking about doing a replacement is to reach out early on with your local USDA rep. Develop a relationship. Find out who that USDA local representative is, you can do that online, and reach out with questions and ask them to explain the application process to you. And they become a really valuable resource along the way to help you submit your application and eventually get that financing. So developing that relationship early on with your local USDA rep. Asking questions, getting yourself educated on the process is very important.

Matthew Gerstner  15:55

I can see how that would absolutely be an important part of the process. What are the benefits of actually tying financial planning into the design process, you know, and developing like a strategic financial plan?

Brad Krump  16:09

Knowing what the organization can afford, before we even start design is really critical. You don't want to design something that doesn't meet the budget or the intent. So if you can do it right the first time rather than doing it, and then finding out you can afford less, it's really hard on both the leadership team as well as the users depending on how much level of engagement you have with everybody in the facility itself. So if we can just get to the point where we're doing it right the first time knowing what can be afforded, and then also use those affordability as a measure of how many services do we really need? How many beds do you actually need? What is your average daily census? What is your use for radiology or for surgery. So you've right size the departments, rather than somebody has a belief that we're going to grow potentially into something, which then makes the project unaffordable?

Nick Smith  17:16

Brad nailed it. And, you know, I think a lot of times strategic financial plan, really, in the context of a major building project is more than just thinking about what we have to do with the facility, because increasingly, hospitals are faced with other large capital expenditures outside of facilities, namely technology. So how are we going to invest and pay for large technology improvements, such as our EHR, Electronic Health Record system, there might be large software systems that they need to put in place, whether it's financial software implementation, or other things like that, analytics programs and software. So you know, those are big ticket expenditures that have to be planned in concert with the facility expenditures that a hospital might have. So kind of layering all that in with, again, the opportunity for growth. So, you know, this is I think, the one of the biggest challenges, but also one of the things that makes this so fun is really thinking about the future, thinking, you know, if we're thinking about rebuilding our hospital or doing a major renovation, let's look beyond what we're doing today. What else could we be doing? Could we be adding new services? Could we be performing surgeries that we're not doing now because of the facility constraints? And then starting to layer on those what if scenarios into the financial planning becomes really important, and really getting everybody comfortable with yes, this does make financial sense. If we're able to make an investment in a larger surgical suite, we can perform these additional surgeries, we can keep more patients local, keep patients healthier, and without having to travel to a larger community for surgery, that's going to be good for our patients, it's going to be good for the financial health of the hospital. But how do we afford to do that? So it's really layering on the capital requirements as well as the additional revenue and potential there, that becomes the exciting and fun challenge of financial planning around a major building project.

Brad Krump  19:24

And Matt, to piggyback on what Nick said, I mean, robotics in OR's in community hospitals, I don't think 10 years ago, I ever would have thought that was the right place. But as the equipment has become a little less expensive, there's the ability to actually provide that in smaller communities. Same way with MRI within the imaging suite again 10 years ago, that was a trailer sitting outside the building on smaller facilities and in in today's world that's been incorporated right into the design of the facility because of the importance of it, as well as the cost has come down a little bit where it's more affordable for the organization, but more importantly, just the taking care of the patients and the needs of the patients within a community.

Matthew Gerstner  20:14

Incredible. I mean, it sounds like there's just a lot going on. There's a lot of potential futures for rural hospitals. And earlier in what we were talking about, you had mentioned that there's all these different layers of potential financing to pull off a critical access hospital new build or remodel. So what are some of the considerations around using county or city tax support for financing? 

Nick Smith  20:43

Yeah, oftentimes, when you when you look at a big project, you look to the community to help support and fund that one of the first questions that we like to ask and understand is, is there a mechanism in there by which the hospital either through being part of a hospital district or other other mechanisms such as a county owned facility, where they can draw on the community resources via tax levy or property tax levy or something like that, to help fund a major building project? And that does come up when it comes to replacing a hospital, especially. A lot of times it does go out to, you know, can can we get this community to support us via additional special assessment or tax levy? When we're thinking about that, though, really, then it becomes Is this the right thing for the community? You know, we're going to be potentially asking our community to invest in the hospital via typically a larger property tax, will they support this? How do we help get the message out and communicate the importance of our hospital to the community, and a lot of times that financing piece from tax levy becomes kind of a make or break for whether a hospital can afford a major building project.

Brad Krump  22:01

Nick, You've seen, I think I've seen, a number of organizations where the support in the community wasn't there, whether the tax base wasn't large enough or the inability to pass something. Do you want to talk a little bit about what happens, what an organization considers when that isn't a possibility? I mean, we've seen consolidation within the state of Minnesota, the smaller independent critical access to just become part of a system. You want to expound on that more,

Nick Smith  22:31

We have seen instances where there wasn't a support to help fund a major building project. And if we're not able to rely on community support via tax Levy, then it really becomes can the hospital afford to finance the project, or their own revenue? Whether it's USDA or, or HUD or traditional, or conventional financing. If not, then it leads to potential outcomes such as, is there a partner who can help us pay for a new hospital, maybe a larger health system, we can become affiliated with a larger health system, and they'll help pay for a replacement hospital or major building project or kind of guarantee a certain amount of funds available for capital projects as part of the affiliation agreement. We see that happen, or the project goes on hold for a couple of years, that the hospital can kind of regroup, think about how to grow and improve their own financial health so that they don't need to be supported by the community or a tax levy. That's oftentimes the case. And I think that's where the real challenge and important work comes in too is when a hospital isn't able to afford a major building project. You know, what is the path? What are the steps that they can take? And what strategies can we develop, to help them to get, you know, 2, 3, 4 years down the line to be able to get to that replacement hospital dream?

Matthew Gerstner  23:55

Sounds like there's a lot of hurdles. It sounds like there's a lot, a lot of things that really need to align properly to make these things happen. And it sounds like a good portion of this too. It happens early on, Brad, like you had said about making sure we're right sizing to begin with.

Brad Krump  24:11

You know, in our design process. The first thing that we do is is talk with senior leadership's, maybe members of the community, about what are the goals for the organization, hopes and dreams, fears. And a lot of times, a critical access hospital will say one of the most important things is the independence. So you know, back to Nick's point about if they're strong financially, the ability to remain independent is something they can consider moving ahead with in the future. And a new facility certainly helps them remain independent to serve those members of the community or to even bring back community members that maybe the facility wasn't prepared to take care of them or didn't have the services available to take care of them at a certain point in time. 

Matthew Gerstner  25:01

Right, right. So, how early on? Would BWBR and Wipfli start consulting? And talking about both this process along with the owner, obviously.

Nick Smith  25:14

In an ideal world, it's great for an organization like Wipfli to be involved, for instance, very early on in the process, because I think, to your earlier question around, aligning, you know, the financial affordability with the facility to design, you know, we need to be able to understand what our options are, what can we afford to take on in terms of debt? How do we get to a replacement hospital? And so, you know, I think some of that upfront planning, three to four months worth of, you know, financial planning, scenario planning, facility master planning, market studies, that important upfront work, pays dividends, in not derailing a potential project and going in eyes wide open and having a clear plan for how to get across the finish line and get to that financing for a building project. So oftentimes, I'll say, a project from when I get the first call from a client asking about replacement hospital or saying, Yeah, we're thinking about doing a replacement hospital or major building project, to actually seeing the construction. It can be, you know, one to two years, when you take into account the application process, the pre-planning work, but it's so important to get the project off on the right foot, so that pre planning work does pay dividends down the road.

Brad Krump  26:31

I'd add on the master plan, that the design team works on, the strategic plan that the leadership team is working on maybe with a third party consultant, as well as the financial feasibility planning that Nick is brought up. All should be happening simultaneously, long before we're talking about a project. 

Matthew Gerstner  26:52

Okay, so as we kind of wrap things up here, can you just kind of describe the steps you're suggesting to an order for capital facility planning associated with the need for financial feasibility study, and a reasonable timeline that it would take to make this happen? 

Brad Krump  27:07

As I just mentioned, different master planning services, financial feasibility study, strategic planning, I believe is a three to four month process. 

Matthew Gerstner  27:20

Okay. 

Brad Krump  27:20

And then there's probably a little bit of time to react to it before everything is done, so that that can be a four to six month process from start to completion. And then at that point, in time you start to really understand how to move forward. Is it continuing to look at a new facility? Is it looking at addition and remodel at your existing location? And then what are the next steps that need to happen? What kind of USDA steps that need to be considered? Should that pre application process have already started early, when we were doing master planning? Or could it just happen at the end of it, and then move forward with whatever we decide needs to happen?

Nick Smith  28:05

Brad's estimates in terms of the timeframe are right on and I always tell clients starting to look at affordability, starting to look at financial planning, looking at your market via market study, assist you in planning. All those work efforts, eventually actually do fold into a financial feasibility study for the USDA. So let's assume if we're going into potential financing with USDA, that front end work actually does then get incorporated into the financial feasibility study requirements. So it's not, it's not as if you're just doing that pre planning work. And then you set it aside and start financial feasibility study and the USDA application, really the strategic plan, the market study, the affordability analysis, the master planning, all those outcomes become the foundation for the USDA application.

Matthew Gerstner  28:58

It certainly sounds like with the current escalation in cost of construction, the size of these projects, the different financing options that are out there, that this is just an extremely important part of the process. Brad, Nick, I can't thank you enough for your time today. This has been an eye opening and enlightening conversation. So thank you both for being here today.

Brad Krump  29:21

Thanks, Matt.

Nick Smith  29:22

Thanks a lot, Matt. Thanks for having Wipfli on.

Matthew Gerstner  29:25

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