Medicaid Payment Increases Allow Hospitals to Re-Evaluate Capital Projects and Leverage Capital Markets
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By Scott Crist and Nathan Summers, UMB Bank, n.a. Capital Markets
With the uncertainty of the pandemic behind us, many hospitals have shifted focus to capital projects postponed during the past few years. This, combined with the recent increase in Medicaid payments, has caused many hospitals to re-evaluate projects and consider how to best leverage the capital markets given their financial resources.
Financial Markets
Healthcare municipal bond yields increased moderately in 2024 Q4 partly due to higher US Treasury yields driven by the Federal Reserve’s monetary policy, inflation concerns, and strong economic data. Despite the recent increase, interest rates remain historically favorable for issuers.
Construction Inflation
Construction costs have stabilized post-pandemic. This reduced volatility has improved the predictability of project costs, allowing more plans to proceed.
Financing Options Available for Hospitals
Attractive interest rates and stabilized construction costs have caused many hospitals to proceed with their master facilities plans and pursue capital projects. Two primary financing structures include Hospital Revenue Bonds and USDA direct loans.
Hospital Revenue Bonds: Hospital revenue bonds’ advantages boast ease of issuance, speed to market, and attractive interest rates. Many governmental hospitals may issue tax-exempt revenue bonds to finance projects, and non-profit hospitals can work with local municipalities to issue bonds on their behalf as a conduit issuer. The process takes 8 to 10 weeks, and with tax-exempt interest rates around 5%, hospital revenue bonds may provide a good option to finance capital projects.
USDA Direct Loans: Direct loans from USDA Rural Development typically require an equity contribution from the hospital with third-party financing for a portion of the project cost (e.g. hospital revenue bond). The USDA portion is financed through a 35 or 40-year direct loan with a fixed interest rate currently just over 4.00%. Approval requires (1) an examined forecast from a CPA verifying the project’s financial viability, (2) a Preliminary Architectural Report (PAR) from the architect stating the need for the project and anticipated cost, (3) USDA application forms, and (4) approval by USDA of the construction drawings, bid process, and project contracts. This process takes approximately 6 to 9 months to complete, and construction notes fund the construction period, and are paid off with proceeds of the USDA direct loan upon substantial completion of the project.
Historically attractive interest rates, stabilized inflation, and the increase in Medicaid payments has created an opportunity for hospitals to pursue capital projects. The best financing structure depends upon many factors specific to individual hospitals and their Boards. Please reach out to us if you’d like to discuss your project and financing options.
Learn more about how UMB Bank, n.a. Public Finance can support your organization’s financing and capital needs, or contact us to be connected with a public finance specialist.
Scott Crist - 816-860-7213, Scott.Crist@umb.com
Nate Summers - 515-368-6073, Nathan.Summers@umb.com
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