WASHINGTON — A critique of two proposed hospital projects in Montgomery County, Md., echoes warnings that the enactment of health care reform will make it more challenging for nonprofit health providers to finance projects through the municipal bond market.
Increasing health care costs to nonprofit hospitals stemming in part from the Patient Protection and Affordable Care Act of 2010 “will make hospital bond offerings increasingly less attractive over the coming decade, driving up the cost of capital” and making some projects “unfeasible,” according to a Maryland report on two hospital certificate of need applications.
Yet two providers are persevering in their competing plans to build the county’s first new hospital since 1979.
Holy Cross Hospital, an affiliate of Michigan-based Trinity Health Credit Group, has proposed a project in Germantown that would cost about $200 million. Adventist HealthCare Inc. has proposed a $177 million hospital in Clarksburg.
The providers have waged a public battle, including campaign pleas on Facebook and YouTube, for the one certificate of need that could be issued by Maryland later this year to the winning applicant.
Last month, the state’s Health Services Cost Review Commission, part of the Maryland Department of Health and Mental Hygiene, issued a report saying neither project application addresses the risks associated with expansion.
Both project applications “fail to give due regard to the enormous uncertainties facing both hospitals” in the coming decade, Robert Murray, head of the cost commission, said in the May 17 report to the Maryland Health Care Commission, which awards certificates of need.
The Health Care Commission is expected to hold a hearing on the applications in late August or early September.
A decision about the certificate of need could come in November, hospital officials said. CONs are required in some states before hospitals can proceed with expansion projects.
President Obama signed the health care reform law in March. Since then, rating agencies have warned that nonprofit health care providers face uncertainty about how they will be reimbursed for services.
Most recently, Standard & Poor’s said in a May report that not-for-profit hospitals face “increased credit risk” in reimbursement declines from Medicare, Medicaid and commercial insurers.
The Maryland cost commission’s report also says hospitals are about to lose enhanced Medicaid matching funds to states that were included in the American Recovery and Reinvestment Act of 2009, which is set to expire at the end of the year. Maryland hospitals will need to make up the difference in Medicaid costs, the report said.
These threats “are likely to lead to significant disruption of bond markets in the coming years” for nonprofit health care providers, the report said. Maryland hospitals “also face the risk of possible modification or elimination of benefits associated with non-profit status,” it said.
Executives from both hospitals said they are confident that their financing plans can get a new hospital completed. The difference in the hospitals’ credit ratings could lead to a disparity in financing costs.
Gary Vogan, chief financial officer at Holy Cross, said its parent company, Trinity Health, is willing to issue bonds for the Germantown project. Trinity is rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Vogan touted Trinity’s credit rating, which is higher than Adventist’s, and said Holy Cross could save about $1 million or more a year with its financing plan.
“I don’t think it is an insignificant issue for the community to look at those relative costs in financing,” he said.
Holy Cross has received financing advice from Ziegler Capital Markets and Navigant Consulting.
Adventist was last rated Baa2 with a negative outlook by Moody’s in January. But James Lee, senior vice president and CFO at Adventist, said the new project would be financed about 85% with bonds backed by the U.S. Housing and Urban Development Department’s hospital insurance program.
The Federal Housing Administration’s Section 242 mortgage insurance program can offer qualifying hospitals double-A backing on tax-exempt bonds.
Prior to the recession, few hospitals utilized the program. In fiscal 2009, HUD reported that 20 out of 43 applicants received the 242 Program backing.
The program application requires, among other things, that hospitals have a certificate of need first, according to HUD’s website.
Lee said Adventist has the environmental reviews in place and its proposed location provides the best access for the community.
“I know there is a lot of turmoil in the bond market and credit market,” Lee said. “Are there going to be hurdles? Yes, but we are confident we will overcome all of those.”