Changes in the bond market have narrowed the options for hospital debt issuance, but many alternatives re-main open. Three crucial changes have occurred this year:

  • Expiration of the Build America Bonds program, which enabled government-owned hospitals to receive a 35 percent governmental reimbursement of their interest costs.
  • The annual debt limit on bank-qualified bonds reverted from $30 million to $10 million.
  • Bonds issued with a Federal Home Loan Bank credit may no longer be transacted on a tax-exempt basis.

Allegan (Mich.) General Hospital, a private critical access hospital, did a $17 million bank-qualified bond issue on Dec. 20, 2010—12 days before the debt limit was lowered.

"I feel blessed that the deal occurred in the manner in which it did," says Richard Harning, Allegan's vice president and chief financial officer. "Part of the $17 million is $3 million for a new information technology system, which will give us a competitive advantage and protect us from reimbursement penalties."

So how should hospitals navigate these waters? Tanya Hahn, a senior vice president with Lancaster Pollard, says government-owned hospitals could potentially take advantage of taxing authority to fund capital projects.

"Expansion projects are things that voters can see the need for," she says. "They can touch it, see it and realize it's an essential service to the community."

Hahn says hospitals also should look into the possibility of a general obligation pledge issued by a governmental sponsor, such as a county with a strong balance sheet.

"Maybe it's a combination of general obli-gation pledges and revenue pledges, depending on the strength of the hospital itself," she says.

Hospitals should consider the potential benefits of a Federal Home Loan Bank credit, even if the transaction must now be done on a taxable basis, Hahn says. If a hospital must do a debt transaction that is less than ideal, it should build in flexibility that allows it to refinance sooner rather than later. And hospitals should proactively manage expiring letters of credit, she says, to avoid unfavorable terms post-expiration.

Richard Clarke, president and CEO of the Healthcare Financial Management Association, says smaller hospitals with weak credit ratings may need to take out loans from community banks to finance capital needs in the current environment. Another alternative is developing leasing arrangements for new equipment.

Hospitals big or small should take care to "manage their balance sheet so they match their exposure on the investment side with their exposure on the debt side," Clarke says. "Hospitals don't want to have a lot of illiquid investments along with debts that hold the potential for collateral calls that demand cash."