Community Developments Investments (June 2016)
Investing in Expanding Health Centers
Source: 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
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.
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
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.
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.
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
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.
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.
7 Capital Link, Capital Plans and Needs of Health Centers: A National Perspective, 2014.