In November 2008, Parkland Health & Hospital System in Dallas was set to issue $705 million in tax-exempt bonds to help finance a new $1.2 billion hospital campus.
But Parkland, Dallas' primary safety net hospital, had to change course after credit markets froze. Instead of tax-exempt bonds, Parkland in August 2009 issued taxable Build America Bonds, a product of the Obama administration's American Recovery and Reinvestment Act of 2009. Government-owned hospitals such as Parkland currently can use the bonds to finance new construction, acquisitions and other capital expenditures.
The incentive? Hospitals receive a 35 percent governmental reimbursement of their interest costs.
"We were able to achieve an all-in (overall interest) cost of 3.71 percent, way below the 4.5 percent we originally planned," says John Dragovits, Parkland's executive vice president and chief financial officer. "If we had gone out at the same time and issued traditional tax-exempts, it would have cost us $122 million more on a net present value basis."
Mike Rock, the American Hospital Association's senior associate director of federal relations, says Build America Bonds offer a "good option for hospitals to have as they seek to raise necessary capital. By reducing the hospitals' costs [of issuing bonds], you in turn reduce health care costs across the board."
Liberty Hospital, a government-owned hospital near Kansas City, Mo., recently issued $24.16 million worth of Build America Bonds as part of a $30 million bond issue. The hospital will use the money for expansion and to pay off a previous bond issue.
"The cumulative interest rate was 4.11 percent," says Joe Crossett, Liberty Hospital administrator. "Over the life of the bonds, it will be a significant savings."
Tanya Hahn, senior vice president of Lancaster Pollard, a national consulting firm, says that combining Build America Bonds with the Department of Housing and Urban Development's 242 mortgage insurance, which helps hospitals access affordable financing for capital projects, could be extremely beneficial to hospitals. "There's a boatload of opportunity there to generate savings," she says.
The current program is slated to end Dec. 31, but the Obama administration has suggested extending it and opening it up to nonprofit hospitals, but reducing the subsidy to 28 percent. At press time, lawmakers were considering if, and how, to extend the program.
The AHA supports an expansion. Rock says nonprofit hospitals need access to Build America Bonds for construction projects and the refinancing of existing debt. "We're working to make that happen," he says.