Community Developments Investments (June 2016)
Financing Health Centers
Source: Capital Impact Partners
Family Healthcare of Hagerstown, Md., has a newly renovated 33,000-square-foot primary care, dental, and mental health facility.
Scott Sporte, Chief Lending Officer, Capital Impact Partners
Health centers meet the primary health care needs of millions of the nation’s Medicaid-eligible and uninsured patients in urban and rural areas long underserved by private practice physicians. Recently celebrating the 50th anniversary of their creation, health centers have grown in size and scope to nearly 1,300 nationwide. They offer a range of comprehensive primary care, dental, and behavioral health services. These community-based organizations act as the nation’s health care safety net, delivering care tailored to the unique cultural needs of the neighborhoods and regions they serve, regardless of patients’ ability to pay.
Despite the income levels of the patients they serve, well-managed health centers operate profitably and have shown over decades very low rates of loan default. The addition of new health care services and growth in the Medicaid-eligible population has led to a need for expanded facilities and financing tailored to the needs of these organizations. These vital expansions present opportunities for banks and other financial institutions to address those needs. Indeed, a recent survey1 of health centers indicates plans for more than 1,000 new projects totaling in excess of $7 billion over the next five years.
Health centers rely on a combination of federal and state grants, Medicaid and Medicare reimbursement, direct patient fees, private insurance payments, and fundraising to provide care. This funding requires health centers to provide cost-effective care but enables annual operating surpluses. Although funding comes from a variety of sources, two (Medicaid and a federal grant) provide the bulk of health center revenues, and continuation and growth of that funding will fuel expansion.
A typical health center receives a federal section 330 grant, representing 30 percent of its total annual revenues, that is designed to offset the cost of care to the uninsured. The section 330 grant funding has been consistent over past decades and recently was reaffirmed through strong bipartisan congressional support extending the funding through 2017. Additionally, the Affordable Care Act (ACA) has made millions of previously uninsured individuals eligible for Medicaid coverage, which has dramatically increased the number of patients served by health centers.
Health centers now serve annually more than 5 million additional patients than they did at the advent of the ACA in 2010, and they are projected to serve at least 6 million more by the end of 2018. Health centers may achieve this level of growth only by expanding their facilities.
Despite consistency of primary funding and increasing patient growth, now, as always, community health centers face many challenges in providing high-quality primary care to low-income patients. Growing demand for services places pressure on providers and facilities. State budget pressures have led to reductions in entitlement programs and services not covered by federal grants and Medicaid reimbursement. Organizations find it difficult to recruit and retain staff willing to work for lower wages in older facilities. Competitive pressures are emerging from small urgent-care clinics in grocery stores and shopping centers. In addition to rising costs, shifting reimbursement streams, and the strain of a constantly growing demand for their services, health centers have traditionally encountered difficulty in obtaining appropriately structured financing for working capital, building projects, and equipment needs. This funding shortfall often exists because of a perception that the health centers’ clientele, funding, and location make them a higher-than-average risk.
Fortunately, experience has shown that community health centers and other community-based health care providers are remarkably resilient and resourceful. A recent survey of health centers administered by Capital Link, a nonprofit technical assistance provider to community health centers nationwide working with the Citi Foundation, has found that health centers have been and are increasingly becoming more financially stable. The survey, conducted with information collected from health centers nationwide for fiscal years 2008 to 2011, uses several financial measures to determine an organization’s financial condition, including liquidity, debt capacity, and profitability.2
Overall, the survey results demonstrate a group of organizations that are in line with traditional financial benchmarks and substantiate that many health centers nationwide present an acceptable credit risk for lenders and investors.
Health centers often suffer from the perception that they are providers of last resort, because they are thought to have outdated facilities, unsophisticated systems, and higher-than-average credit risk. One national lender has, however, proven that health centers are a good credit risk and has made them the core of its lending activity. For more than 30 years, Capital Impact Partners, known until 2014 as NCB Capital Impact, has worked with community-based health care providers to fill the gap of financial knowledge and need and to provide assistance and offer a variety of appropriately structured loan products to finance working capital, facility acquisition, expansion and renovation, and new equipment purchases.
Capital Impact Partners is a community development financial institution (CDFI). As a mission-driven lender, Capital Impact Partners uses its tools of financing, technical assistance, and policy engagement to improve access to health care, education, housing, and healthy foods in underserved areas around the country. Because it is a mission-driven lender focused on social impact outcomes, Capital Impact Partners is often willing to provide loans to health centers that traditional banks shy away from.
With financing from Capital Impact Partners, health centers in many parts of the United States have demonstrated that they are a low investment risk, while improving their facilities’ efficiency, expanding capacity, and maintaining a high quality of care for their patients. Over three decades, Capital Impact Partners has provided more than $750 million in debt to over 500 health centers in 24 states. Together, these health centers serve over 2 million patients annually.
Capital Impact Partners often works in partnership with public and private organizations to build loan funds that help create attractive financing options for health centers. Examples of creative financing partnerships are Capital Impact Partners’ long-term relationships with the California Primary Care Association to create the CPCA Ventures Loan Program and the California Endowment to launch the Healthier California Fund. As a result of its work in California, Capital Impact Partners has provided financing to over 50 percent of health centers and clinics in the state.
This national portfolio has performed very well, with delinquencies averaging less than 0.5 percent per year and total losses of less than 0.1 percent.
A recent example of the type of project commonly financed by Capital Impact Partners is the South of Market Health Center (SMHC), in San Francisco. SMHC desired to construct a new facility and move from cramped rented space. SMHC’s board and management wanted to construct a building that would be a focal point for their community but wouldn’t, in their own words, “look like a clinic for poor people.” For this project, a $4 million construction and permanent loan from Capital Impact Partners augmented the clinic’s $500,000 capital campaign to make the new building a reality. Capital Impact Partners worked closely with management to structure payments anticipating improved cash flow after an initial ramp-up period. The results matched expectations.
Approaches to Health Center Financing
As health centers expand, so does the need for financing options. Fortunately, with organizations like Capital Impact Partners as a model, the job of educating lenders about community health centers and the unique financial opportunities and challenges they face has become less difficult.
Although community health centers face many concerns in providing care to low-income individuals, the challenge of facilities development is not insurmountable. Community health centers are essential community resources with a real need for financing capital expansion to meet growing health care needs. It is essential that lenders view community health centers as vital resources and seriously consider them as viable borrowers. Ways to minimize a lender’s transaction risk include pooling of resources and sharing transactions with other institutions, as described in the article on the CDFI Fund and Opportunity Finance Network.
For more information, e-mail Scott Sporte.
2 Community Health Center Financial Perspectives, Issue 1: Financial and Operational Ratios and Trends of Community Health Centers, 2008–2011: A Guide for Health Centers, Capital Link and Community Health Center Capital Fund, August 2013.