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Hospital expansion: How is it financed, who pays for it? PDF Print E-mail
Saturday, 06 February 2010 10:25


• Daily Leader

Southwest Medical Center is seeking public approval for a $17 million bond issue to assist with upgrades at its facilities, and its chief financial officer believes the hospital has the cash flow necessary to handle that debt.

“When you are financially successful, you have cash to deal with the hiccups that come along like this economic situation we all view as temporary,” Delany Fawkes said.

This is SWMC’s first project in nearly 20 years, and as payments have been made on a bond from 1991, the hospital has built up its cash levels for a project such as the one currently on the board.

“Those payments will end in 2013. We’ve built up some needs,” Fawkes said.

At the start of planning, hospital officials talked to architects with what Fawkes referred to as a complete wish list of items for the project.

“It was a $40-million project,” he said. “The stuff we need to do now, we really need to do now. What a perfect time. Bond interest rates are at a 40-year low. The projections I’ve seen most recently are 4.65 percent.”

The hospital is looking to lock in on interest rates, which are at their lowest levels in years, in order to pay off the proposed bond by 2038.

“It’s a perfect storm in terms of the timing for this,” he said. “We have the needs for the project. We haven’t done anything in 20 years. A healthy hospital needs to keep pumping money back in it to keep its fixed plant up to date.”

Fawkes said the infrastructure piece of the puzzle has to be done no matter what happens with the bond.

“It breaks out very nicely for us,” he said. “$5.3 million for the down payment for the medical office building. If we didn’t do anything, we’d be debt free in 2013.”

Fawkes said unlike many hospitals, SWMC does not do leasing.

“We have no other debt,” he said. A lot of hospitals are up to here with debt. Their cash is low. They’re day-to-day. They don’t have room for hiccups.”

Fawkes said this situation does not exist at the Liberal hospital.

“We don’t ever want to be,” he said. “We’ve never taken tax money in 45 years, and we don’t want to start doing it. If we’re smart, we can do the right things, and we won’t have to do that. The community won’t have to put up with that.”

Fawkes said hospital operating revenues will pay for the proposed bond.

“We’ve proven we can do this,” he said. “This is just more of the same. We’ve proven since 1991, we can make this level of debt service payments with no problem at all. If there are hiccups, we have cash reserves that we’ve built up that can carry us over the hiccups.”

Fawkes said the major cost any hospital incurs comes from salaries and wages, and that total came to about $17 million in 2009 for SWMC.

“Over the previous five years, 2004-2008, our bottom line averaged $2.5 million,” he said.

Fawkes said the financial impact of inpatient volume decreased about 17 percent in 2009 at the hospital.

“That is directly related to the physician situation. Physicians create health care demand,” he said.

Fawkes said the March 2 bond election is critical for the future of Liberal.

“This is only going to get worse,” he said referring to the needs of the hospital. “It’s going to be a crap shoot enough recruiting physicians here even with the MOB. The numbers just aren’t there. There’s just not that many young physicians who want to come  to a community like Liberal. We’ve got to grab the ones we can grab.”

When the 1991 bond was issued, Fawkes showed the level of debt service for the hospital. After that bond was refinanced in 2001, the debt service level dipped slightly.

“Now, we’re in 2010,” he said. “You’ve got 2013 where this thing just ends. Along comes the new (now). Now, it’s just like double. It would be double for these two years.”

After those two years, payments would be approximated at a level just a little bit higher than the payments being made on the 1991 bond, but lower than those made in the two years.

“The way the experts structure this thing, it’s not going to be double here. Instead of being up here for these two years, it’ll be maybe here,” Fawkes said. “When it comes down, instead of being way down here, it’ll be a little bit higher.”

This is called a wrap, and with this system in place for two years, the hospital’s debt service payments will be about $700,000 more than they currently are.

Fawkes said SWMC has prepared for the proposed bond by moving $150,000 a month from its operating funds to its reserves for future capital needs.

“We pay for our ongoing capital needs out of operating cash,” he said. “We’ve had a few times we have paid for certain capital things out of reserves, but for the most part, this has been like clockwork for eight years. When I came here, our total cash reserves was about $4.4 million. That was at the end of ’01.”

That number currently stands at $18.7 million, which Fawkes said is partly due to the lack of a project at SWMC.

“It’s a sign of health to do it this way,” he said. “We can afford the $5.3 million for the medical office building out of the $18.7 million and still have reserves for the hiccups, the rainy days, the things that might happen, the bad economy.”

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