Henry Grady and Greg Oliver lead NFP Hospitals & Health Systems Industry Specialty for Truist and deliver the power of Truist's Business Lifecycle Advisory approach to help organizations anticipate challenges and seize opportunities on their path to success.
Over the past three years, businesses across all industries have had to contend with unprecedented challenges. Not-for-profit health systems and provider networks were no exception and often bore a disproportionate burden from being on the front lines of the pandemic. Some of these challenges include:
- Labor – Clinical staffing scarcity, burnout, staff poaching, and wage pressures along with an aging workforce combined to make it difficult for healthcare providers to keep facilities staffed and employees engaged.
- Waning demand for services – Many organizations are still finding their way in the face of changing dynamics within preventative, elective, and acute care. Sorting out new care delivery models, volatile patient volumes, and supply cost increases has been a tough task.
- Combating healthcare deserts – The COVID-19 pandemic highlighted significant access-to-care gaps in many communities. As providers seek to deliver clinical services in underserved areas (where there are often higher levels of uninsured and underinsured patients with significant care needs), it can be difficult to provide these services without exacerbating already thin margins or depleting valuable liquidity. Many providers have struggled with operating losses and have even had to shutter underperforming facilities located in these areas. These tough decisions bring with them brand and reputational risks and are often at odds with a provider’s mission and the community’s need.
- Funding capital projects – The cost of capital is up, and economic conditions remain difficult. The Federal Reserve’s interest rate increases are having a far-reaching impact, and a return to a stable economy isn’t yet in sight. Inflation and supply chain disruptions continue to have a profound effect on project feasibility.
These are just a handful of the financial pressures hospitals are facing, and there’s no clear path to predictable or “normal” operations. All aspects of healthcare delivery have become more complex and with this complexity comes both risk and opportunity.
What healthcare systems should be reassessing right now
As management teams flip the calendar to 2023, there are tangible steps that organizations can take including investigating alternative forms of financing for community clinical endeavors, evaluating alternatives to traditional real estate acquisition and development approaches, and utilizing interim or “bridge” financing for larger capital projects that might be traditionally financed with long-term public bond debt.
Consider New Markets Tax Credits (NMTC) to locate facilities in economically distressed areas. The NMTC program incentivizes community development and economic growth by using tax credits to attract private investment in economically distressed communities. For projects in eligible areas, the NMTC program can help healthcare providers expand their mission and serve underserved communities by reducing the amount of direct financial commitment needed to get a project off the ground or to expand an existing program.
Tax credits help defray the costs of setting up or expanding in low-income areas and can make otherwise marginal projects become more feasible. In one example, Truist worked with a major regional health system to utilize new markets tax credits to renovate an HIV clinic in a disadvantaged area. The new and improved HIV/AIDS clinic operates in a part of the city where infection rates are six to eight times higher than the national average. The renovation expanded access to dental treatment, imaging, infusion, lab services, pharmacy, and social support services. It was the third time the health system used Truist’s NMTC program to expand or improve services in underserved communities.
How new markets tax credits work
The New Markets Tax Credit Program, established by Congress in 2000, harnesses a public-private market structure to support the expansion of services to low-income communities. Capital providers have the ability to receive a federal tax credit in exchange for making equity investments in intermediaries known as Community Development Entities (CDEs).
These CDEs utilize the capital to provide subsidized financing to eligible projects that are providing critical goods and services, such as affordable healthcare, to low income persons in their geographic service areas. This financing can be used to construct the building, purchase equipment, and pay certain soft costs.
The capital is loaned to the project as low-rate, interest-only debt and is available upfront to apply toward eligible project costs. At the end of a seven-year compliance period, the loan has the opportunity to be forgiven.
Examine your financing options: public markets or bank debt? The challenging economic environment has forced many health systems to delay or defer major capital projects as the cost of financing, labor, and materials along with general supply chain problems have made it difficult to get projects completed. Additionally, capital and project budgets approved just months ago may already be out of date in the face of this volatile economy.
The rise in interest rates has left many organizations with more expensive variable-rate debt and made previously attractive refunding options unfeasible. It’s more important than ever to revisit the details of your current capital structure and to investigate alternative capital sources. Keep the big picture in mind: Interest rates should normalize at some point and organizations will want to be ready to take advantage when they do. Management teams can position themselves for success by establishing or increasing lines of credit to help with cash flow challenges and to ensure that necessary projects remain on track. By utilizing a line of credit as a “bridge” facility to the public market, organizations will be able to keep important projects moving and be able to take advantage of more favorable market conditions in the future.
Rethink your approach to cash management. Have you put certain bank accounts on set-it-and-forget-it mode? Are idle balances sitting in obsolete transaction accounts earning little to no interest? If so, taking the time now to relook at these accounts may lead to opportunities to improve the yield earned.
Update your investment policy. When was it last updated? Dust it off and look at the details. How does it align with your current needs? For example, is it too restrictive? If so, you probably want to update it to provide additional latitude while staying within your risk parameters.
Explore alternative real estate funding options. As one of the only commercial banks in the country with its own REIT (real estate investment trust) portfolio, Truist has been able to work with health systems on strategies to free up liquidity, reduce the risks inherent in commercial real estate ownership, and still allow for the retention of operating control for the health system.
These alternatives can allow health systems to develop new facilities with the flexibility of leasing rather than using cash for the initial investment. Projects are typically structured with an option for the hospital to acquire the property in the future.
You don’t have to go it alone. Many healthcare providers are opting to form joint ventures with physicians or other clinical operators for a variety of community needs including primary care, urgent care, home care, ambulatory surgical centers, etc. A well-structured joint venture can be an excellent way to deliver on your organization’s mission without having to fund 100% of the start-up costs.
Look at your employee benefits and their costs, including your pension plan. The ability to attract and retain employees has never been more important to healthcare organizations. Hospitals need to find ways to deliver competitive benefits at the best possible value. Are there opportunities to make changes to existing benefit packages without impacting employee satisfaction? Are the offerings that your organization provides relevant to today’s workforce? Are there programs that are underutilized? Are there ways management can reduce costs without compromising the ability to attract candidates? Lastly, many hospitals & health systems have struggled for years with underfunded pensions. Now that these liabilities have decreased due to the increase in interest rates, it might be a good time to take another look at a pension restructuring.
Let our healthcare experts put their experience to work for you.
Want to talk through ideas or get a fresh take on options you might not have considered? With Truist’s Business Lifecycle Advisory approach, our NFP Hospitals & Health Systems team can offer objective guidance and practical solutions to help your hospital or health system stay in good shape so you can continue to deliver care to the patients and communities you serve. To learn more, visit our website.