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Community Developments Investments (June 2016)

Investing in Expanding Health Centers

Katy Trail Community Health buildingSource: Opportunity Finance Network

Capital Link’s lending affiliate, Community Health Center Capital Fund, and Local Initiatives Support Corporation financed the expansion of Katy Trail Community Health’s medical and dental services.

Peg Underhill, Director of Marketing, Communications, and Development, Capital Link

As Affordable Care Act (ACA) implementation proceeds, demand for primary health care is increasing, especially in low-income communities where residents are newly eligible for insurance. Federally qualified health centers (FQHC or health center) are well-positioned to respond to this demand but are challenged by the reality of expanding capacity with limited resources.

The funding environment for health centers has become increasingly uncertain and competitive, and, realistically, it will provide capital for only a small percentage of the health centers that need to renovate or build new facilities. Finding new ways to support the growth of health centers is crucial because these safety net providers contribute to the stability and development of communities across the country.

Providing Comprehensive Care

Health centers are community-based, patient-directed organizations that provide comprehensive medical services—including primary and preventive care, dentistry, and mental health/substance abuse services—to persons of all ages, regardless of their ability to pay. Health centers also provide supportive services, such as education, translation, and transportation, which make it easier for residents to access health care. By meeting select criteria, such as serving underserved areas or populations and offering a sliding fee scale, health centers receive benefits, such as grants under section 330 of the Public Health Service (PHS) Act, and enhanced reimbursement from Medicare and Medicaid.

Federal funding, most recently from the American Recovery and Reinvestment Act of 2009 and the ACA, has resulted in a $12.5 billion increase in investments in health center property, plant, equipment, and leased space and the number of health center patients nearly doubling over the past decade.1 With the goal of expanding capacity to serve 32 million patients, up from 22.8 million in 2014 (see figure 1), in the coming years, additional growth is expected and investment is needed.

Figure 1. Health Center Patient Growth, 2002–2014

Figure 1: The bar chart titled figure 1. Health Center Patient Growth, 2002–2014 has blue bars showing the steady annual increase in the number of patients served by health centers. The bar chart shows the number of patients served almost doubled from 11.3 million in 2002 to 21.7 million in 2012, and grew to 21.7 million in 2013 and to 22.8 million in 2014. Capital Link is the source for the data and the bar chart.
Source: Capital Link

Expanding Needs

Many health centers operate in older buildings (20 to 110 years old). In a study released by Capital Link in October 2015,2 79 percent of health centers indicated they had specific plans to initiate capital projects within the next several years, representing 2,300 potential capital projects. These projects would allow health centers to serve an additional 5.4 million patients—considerably short of the 10 million additional patients expected to seek care at FQHCs by 2020. In order to achieve the goal of serving 32 million patients by 2020, health centers will likely need to invest $8.5 billion (based on Capital Link’s 2015 needs assessment) in new physical infrastructure, which is almost $4 billion more than currently anticipated. Funding for health center-owned projects, however, has been identified and secured for only 25 percent of these planned projects.

Although additional federal capital grants may be on the horizon, supplemental funding sources are needed to fill the gap. This gap represents a window of opportunity for health centers.

Financing Growth

Health centers are actively seeking alternative funding sources to meet growth plans and are looking to lenders and investors, including community development financial institutions (CDFI), to finance growth.

Many lenders that look closely at the health center business model find health centers are worth the risk.

Capital Link conducted a survey of 16 CDFIs working in partnership as the Lenders Coalition for Community Health Centers, an advocacy and information-sharing collaborative that represents the most active CDFI lenders providing financing to the health center industry. The survey found that the incidence of health center failure and loan default is quite low (1 percent) and has remained low for some time.3 This finding is the case even though, as mission-based organizations, health centers operate with thin margins and limited cash, and tend to allocate resources to improving community health rather than building reserves.

Other Capital Link studies of the health center sector support the finding that the health center business model, when well implemented, can responsibly use debt to fuel growth. For the typical health center, leverage is low and cash available for debt service is relatively untapped, suggesting an increasing number of health centers can secure debt as a way to accelerate and manage their growth.4

Federal Support

The U.S. Department of Health and Human Services (HHS) has provided a number of resources to assist health centers in planning for operational growth and facilities expansion. In fact, Capital Link was established through a cooperative agreement by the Health Resources and Services Administration (HRSA) within HHS to provide planning and financing resources to health centers struggling with facilities and operational expansion.

Supported by the HRSA cooperative agreement, Capital Link offers a range of technical assistance to health centers, depending on their needs and progress in planning for a capital project. Capital Link’s protocols include assessing the health center’s capacity to expand by determining its financial strengths and weaknesses, offering comparative data on typical project costs based on the approximate size of the proposed facility, and pinpointing the health center’s ability to finance a defined capital project.

This analysis allows health centers to estimate the approximate debt and equity they need to accomplish their goals and provides a general overview of possible funding sources, considering project size, location, and other funding criteria. These sources may include New Markets Tax Credits, loans and loan guarantees from the U.S. Department of Agriculture, conventional loans from banks, state financing programs, tax-exempt bonds, and loans from CDFIs, often in combination.

Other types of Capital Link assistance work to build health center capacity to achieve successful project completion, including providing resources related to strategic planning; market assessment; program, staff, and space planning; business planning and financial projections; design development; financing (including fund raising and debt financing); building phases; and making the new facility operational. These activities are supported by a range of written, electronic, and web-based resources, as well as frequent training sessions on capital development topics and improving financial and operational performance in preparation for growth. Written resources and webinar recordings are available to health centers and primary care associations through Capital Link’s website, free-of-charge through HRSA’s support.

Educating Lenders

To encourage greater knowledge and understanding of the health center industry among capital funding sources, training and educational materials have also been offered to lenders. For example, the U.S. Department of the Treasury’s CDFI Fund supported a capacity building initiative enabling CDFIs to develop the skills to successfully finance community health centers in medically underserved markets. The Opportunity Finance Network partnered with Capital Link and other leading industry experts to offer CDFIs six free two-day training workshops from January through June 2014, providing a comprehensive overview of the health center landscape and how CDFIs can provide financial services to health centers. Resources from these training workshops are available.

Community Impact

Investing in health center growth provides numerous community benefits. In addition to expanding access to health care in disadvantaged areas and preventive care that reduces overall health care costs, health center growth generates jobs and tax revenues and attracts new businesses to low-income communities. Studies point to a definite link between access to affordable health care and entrepreneurship and small business development.5

These community impacts can be measured. Using an integrated economic modeling and planning tool called IMPLAN and the latest data from HRSA’s Uniform Data Systems, Capital Link recently completed an analysis to capture the economic benefits of health centers nationally (see figure 2). Health centers collectively generated more than $45.6 billion in total economic activity for their local communities in 2014, a 46 percent increase since 2010. Employment grew from 247,346 jobs in 2010 to 339,794 jobs in 2014, a 37 percent increase.6

Figure 2. National Economic Impact and Job Increases, 2010–2014

Figure 2: There are two charts in Figure 2 that is titled National Economic Impact and Job Increases, 2010–2014. The first chart shows that the total number of jobs in the health center industry grew by 37 percent from 247,346 in 2010 to 339,794 in 2014. The second chart shows that the health centers collectively generated more than $45.6 billion in total economic activity for their local communities in 2014, a 46 percent increase since 2010 when the economic activity was $31.1 billion.
Source: Capital Link

Because of their success in delivering care and their increasingly important role, health centers continue to receive bipartisan support. Providing new capital funding sources to health centers will help them fulfill their crucial role in serving the newly insured and remaining uninsured populations as health reform proceeds.

For more information, e-mail Peg Underhill.

Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.

 

1 National Association of Community Health Centers, A Sketch of Community Health Centers Chart Book 2014, federally-funded health centers only. 2001–2012 Uniform Data System, Bureau of Primary Health Care, Health Resources and Services Administration, U.S. Department of Health and Human Services.

2 Capital Link, Capital Plans and Needs of Community Health Centers: A National Perspective, October 2015.

3 Capital Link, Community Health Center Perspectives: Identifying the Risks of Health Center Lending: A Guide for Lenders, October 2014.

4 Capital Link, Community Health Center Perspectives: Financial and Operational Ratios and Trends of Community Health Centers, 2008–2011, a Guide for Lenders, March 2014.

5 U.S. Small Business Administration.

6 Capital Link, Health Centers Have a Powerful National Impact, January 2016.

Photo of Tom Manning of Harbor Road speaking..Source: Opportunity Finance Network
Tom Manning of Harbor Road, a founding staff member of Primary Care Development Corporation, speaking at an Opportunity Finance Network workshop.

Health Care Financing and CDFIs

Annie Donovan, Director, Community Development Financial Institutions Fund, and Pam Porter, Executive Vice President, Strategic Consulting, Opportunity Finance Network

The future of American health care is tilting toward more primary care and preventive care. The need for health center services is projected at 32 million patients by 2020, according to the National Association of Community Health Centers and the Health Resources and Services Administration. As a result, health centers, including federally qualified health centers (FQHC), are poised to continue growing to meet the need for these new health care services in medically underserved communities. Financing for health centers to meet these needs and expected increasing demand is a growth market for both community development financial institutions (CDFI) and banks.

Financing Outlook

For banks and CDFIs, there is a compelling opportunity because health centers have a projected need of $10.3 billion (based on Capital Link’s 2014 needs assessment) for capital over the next five to 10 years, as estimated by Capital Link.7 For health centers to meet their communities’ demands for primary care services, more banks and CDFIs must finance health centers, independently and in collaboration.

The CDFI Fund is committed to improving the quality of life and economic opportunity in low-income communities, and affordable health care is a significant part of that equation. In 2013, however, only a few CDFIs had extensive experience financing community health centers. To help address the experience gap among CDFIs, the CDFI Fund began a nationwide capacity-building initiative to provide technical assistance and training on financing community health centers for interested CDFIs. The CDFI Fund contracted with Opportunity Finance Network to develop and deliver training and technical assistance to CDFIs and other financial entities that could then deliver financial products and services directly to health centers serving underserved communities.

Opportunity Finance Network partnered with experienced and innovative practitioners in the health center financing field. Together, they brought the latest information on financing for health center facility rehabilitation and growth. While few CDFIs have historically lent to health centers, those that have can point to impressive track records in this sector. Capital Impact Partners, Primary Care Development Corporation, and Capital Link together demonstrate decades of CDFI experience, thousands of health center transactions, and billions of dollars of financing. These organizations know the business models of health centers, how to evaluate management capability, and the indicators to assess and manage risk in lending to health centers. While the past is no guarantee of the future, experienced lenders report the history of troubled loan ratios to be less than 1 percent.

Training

Initial training and resource materials were offered to CDFIs through a series of two-day training sessions across the country. The series included a historical perspective on health centers as background for these mission-driven nonprofit organizations. In addition, the training looked at how the expanding numbers of insured Americans are increasing the overall demands for affordable, quality health services. Both in-person and online training was provided on topics such as health care sector trends, community needs assessment, underwriting, program designs for lending to health centers, and other relevant topics. During the training,10 chief executive officers from health centers across the country attended and explained their business models and experiences seeking financing. This synergy provided lenders with important insights into the challenges and opportunities facing health centers in today’s environment.

Following the success of the live training, the CDFI Fund is providing an electronic resource bank of written materials on its website for CDFIs and other users. In addition, the CDFI Fund has conducted a series of five webinars that complement the written materials. Materials are available at the CDFI Fund’s website.

Opportunity Finance Network worked with industry experts to develop the training support materials for the training sessions and the webinars, which are available on the CDFI Fund’s website under Financing Community Health Centers Resource Bank: Training Curriculum. Topics include

  • understanding the landscape,
  • underwriting, and
  • using benchmark data to evaluate operating performance.

Over 200 people working with 60 CDFIs and partner organizations, including 10 representatives of seven banks, took part in this training. Many of the attending organizations now are developing plans to build relationships with health centers in their communities and to learn about their financing needs for

  • facility acquisition and development,
  • facility refurbishment and expansion,
  • equipment purchase, and
  • working capital.

Partners

CDFIs, especially unregulated loan funds, have flexibility to lend to health centers in ways that can be challenging for regulated banks. The most obvious example is the financing of a facility in a low-income community. It is not unusual for the cost to build or renovate a health center facility to be more than its appraised value, or at least to exceed loan-to-value (LTV) thresholds of most banks. CDFIs’ loan funds can often, however, work with greater flexibility to structure loan terms to mitigate this challenge. Key to successful financing is understanding the business models and cash flows of the health center. This understanding helps CDFIs make loans based on real-time business operations, rather than the LTV or collateral coverage ratios typical in commercial real estate loans.

CDFIs can also assist with bringing in additional financing opportunities, such as the New Markets Tax Credit (NMTC), to FQHCs. NMTC deals can provide equity and interest rate cost benefits to FQHC projects located in eligible low-income and distressed communities. CDFIs experienced in NMTC transactions can provide trusted counsel and education to support health centers with NMTC deals, resulting in more successful transactions.

As Opportunity Finance Network and the CDFI Fund see it, there are many opportunities for banks, CDFIs, and health centers to work together to ensure that primary health care services are available to all communities across the United States.

For more information about CDFIs or the CDFI Fund, visit the CDFI Fund website or e-mail Annie Donovan.

For more information about Opportunity Finance Network, e-mail Pam Porter.

Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.