The state has already secured $775 million for the $1.2 billion project
The proposed successor to Charity Hospital should be in a strong position to obtain federal government backing of the borrowed money that will be necessary to complete the project, a battery of consultants said Thursday.
View full sizeThe hospital is planned for a lower Mid-City tract bordered by South Claiborne Avenue, Canal Street, Galvez Street and Tulane Avenue. The area was photographed in April 2008.After hearing presentations from J.P. Morgan Chase and other financial advisers, the University Medical Center governing board gave its approval to file a preliminary application for the U.S. Department of Housing and Urban Development's mortgage insurance program for hospitals. The coveted federal endorsement would allow the hospital to sell bonds at lower rates - meaning lower annual debt payments - than if the UMC board has to attract investors based only on projections of future hospital revenues.
The timeline laid out by the financial team, hired by the Louisiana State University System before the UMC board convened for the first time last month, has the project hitting the bond market by the middle of 2011. UMC Board Chairman Robert Yarborough said that would still allow site-preparation and other construction activities to begin as early as December.
Michael Maloney, who leads one of J.P Morgan's healthcare financing divisions, told UMC board members that it is "fairly likely" the project can win approval from power brokers at the Federal Housing Administration, the HUD agency that runs the insurance program. But the financial team, hired by Louisiana State University before the UMC board held its first meeting last month, noted that only a quarter of the institutions that apply for the FHA program win approval.
"This is really the highest bar in terms of securing financing for a hospital," Maloney said. "Their requirements are the most stringent. ... That's why we are holding ourselves to that standard."
Despite giving their approval, several board members made it clear that they are not ready to commit to a financing path for what is projected as a $1.2 billion, 424-bed complex in Mid-City, adjacent to the existing downtown medical district. "I want to make sure the numbers work, and if they don't work, I'm going to say so," David Voelker said after the meeting.
The state has $775 million secured for the project already, a combination of federal hurricane recovery grant money, state capital outlay appropriations and the FEMA settlement for Hurricane Katrina damage to Charity Hospital. The state could be in line for an additional $50 million to $100 million from FEMA to cover damages to Charity's contents. That second FEMA settlement notwithstanding, UMC would need about $425 million to complete the latest projected budget.
A May 2011 report from a consultant hired by Gov. Bobby Jindal's administration suggested that UMC should borrow additional money to have operating reserves when the hospital first opens.
A team from Causey Demgen & Moore, a Denver firm that specializes in health care capital projects that use the federal mortgage insurance, told the board that it will complete by the end of the month an analysis of how much debt the project can support. The firm will follow with a more detailed analysis of the business model that must precede any bond sale. Both efforts are necessary as part of the federal application process.
Jack Blumenthal of the Causey firm and Maloney said UMC could file a "pre-application" with HUD by Oct. 15, with the hope that federal authorities would take no longer than a month to review it and grant permission to file a formal application.
The consultants said they could submit a formal application as early as Feb. 15, after Causey completes the more detailed feasibility study of the hospital's projected operations model, which includes utilization rates and the mix of payment sources among patients.
Blumenthal told board members that nothing in the preliminary application will tie the board's hands, leaving UMC free to change details in a final application or pursue other financing options. It is clear, however, that winning HUD-backed debt will be the cheapest capital the UMC board can obtain, particularly given the uncertainties of the health care market and the wider economy.
The Causey team presented some general conclusions of the work it has already done on the debt capacity study, essentially echoing the "if you build it, they will come" findings of earlier LSU and state consultants.
Patient volume growth is based on an assumed 2 percent annual population growth in Orleans, Jefferson and St. Bernard parishes; 4 percent increases are expected among residents at least 65 years old. A new hospital, the Causey report states, could expect a 10 percent to 30 percent increase in referrals from other state safety net hospitals, though the presentation did not directly address Gov. Bobby Jindal's proposals to drastically scale back the LSU-run Charity system.
The report assumes that about 50 percent of existing uninsured population will become insured under the new federal health insurance changes. The report also noted the "potential attraction" of an estimated 6,000 New Orleans area patients who now travel out of state for care, along with "general growth in market share" that would come with a new facility.
Voelker raised questions about how the consultants can project the effects of a federal health care that won't be fully implemented until 2014 at the earliest. Reacting to projections of the new hospital drawing patients from other facilities, he said, "It seems like we'd be robbing Peter to pay Paul, here. ... The folks at Ochsner and Children's Hospital aren't the 'Oops, there goes another patient' type. They're going to compete."
Bill Barrow can be reached at bbarrow@timespicayune.com or 504.826.3452.