Accessing capital in growth mode

Over the last decade, Metro Health – an integrated health system based in and around Grand Rapids, Mich. – has been able to set itself apart from other community hospital systems in part by its ability to access and leverage capital. The health system has used fixed-rate bonds to support new primary and specialty-care facilities, build a replacement acute care hospital and create an electronic health records system that is fully integrated between the hospital and its ambulatory sites.

Metro's success offers a template for best practices in capital acquisition, as opportunities are ripe for hospitals to access capital through strategies such as public issuance of debts and securities.

"Right now the capital markets are very strong for healthcare providers who are seeking capital to access funding at competitive interest rates and terms," said Quintin Harris, a vice president at Lancaster Pollard, which provides financial advice and financing solutions to sectors including healthcare. "There is likely to be a small window of opportunity for issuers to take advantage of the low supply of issuance of new securities and tightening credit spreads."

Capital to expand

Tim Susterich, Metro's chief financial officer, said the health system intends to fulfill between $100 and $150 million in known capital needs over the next five years to continue growth. That includes potential expansion into geographic areas beyond greater Grand Rapids and the surrounding counties its facilities currently serve, and enhancement of both its medical staff and its Epic IT systems. To that end, plans are underway to form a joint venture with one of the nation's largest for-profit healthcare systems, Community Health Systems.

The partnership would bring to Metro Health not only access to capital, "but also economies of scale in our operations," Susterich said. "We can tap into their resources at the corporate level that are not necessarily available to us now except through third parties." At the same time, the expected joint venture will bring to Community Health Systems its first ownership interest in a Michigan healthcare system.

For Metro Health, the time was right "to test the market to see what our value was," he said. "We are doing this from a position of financial strength."

Best Practices

Hospitals, of course, may find advantage in pursuing the same route as Metro Health. "The not-for-profit and for-profit larger healthcare systems are looking for geographic dispersion," Susterich said, "so there might be a high level of interest in a conversation about how to access those particular areas through a joint venture or merger."

But according to Lancaster Pollard's Harris, it's a wise idea to multi-track a couple of financing options at the same time, so that a hospital can close on the better deal when it is ready to execute. As an example, Lancaster Pollard started working with one hospital in 2012 on a capital-financing project for which it initially expected to conduct a public issuance of bonds. "Then, in the summer of 2013, when the markets changed, interest rates rose very quickly and it became more feasible and advantageous to place the bonds directly with a commercial bank," said Harris. "We always had that alternative financing structure in our back pocket when we started working on the project."

It's important to remember, though, that funding options may be constrained depending on a hospital's structure. Privately-owned, non-profit 501 (c) (3) hospitals, for example, have to work with a conduit issuer, which is a city, county or state issuer, to access the capital markets with taxes and bonds, Harris said, while government-owned hospitals may not be able to pledge a mortgage or may be limited with regards to terms of bonds.

"A best practice is to consult with a healthcare investment banker or financial advisor who is experienced with a wide variety of funding structures to understand their options and the pros and cons of each," he said.