Financing the New

Health Care Model

the

Shift from Institution to Home

Presenting

Bob BlackCCM, CHC, FASHECapital Performance Management

(913) 381-1481bob@cpmworks.com

Why Use Tax-Exempt Bonds?

Options Available to Fund Capital Projects◦ Pay as you go◦ Philanthropy*

Donations Endowment Third party guarantees

◦ Grants◦ Conventional loans and other taxable

financings◦ New Market Tax Credits◦ Tax-Exempt Bonds

Tax-Exempt Bonds

Tax-Exempt Bonds Compared to Taxable Debt◦ Generally Lower Rates◦ Flexibility of Terms◦ Longer Maturity Dates◦ Balance Sheet Leverage

Written Promise To Repay Money◦ Amount Borrowed◦ Interest Rate◦ Maturity Date◦ Redemption Terms

Parties to a Bond Issue?

Issuer (State or Local Government) Borrower – i.e. Hospital Trustee Underwriter

◦ Senior Manager◦ Co-Managers◦ Selling Group

Financial Advisor Investors

Types of Tax-Exempt Bonds

Tax-Exempt Bonds

Private ActivityBonds

Exempt FacilityBonds

(Section 142)

Qualified MortgageBonds

(Section 143)

Small Issueand First Time Farmer Bonds

(Section 144(a))

501(c)(3)Bonds

(Section 145)

GovernmentalBonds

Bond Issue (Simple Fixed Rate)

UnderwriterBondholders

Issuer

Borrower

Trustee

$

$

$

$

$Bond Payments

Bonds/Official StatementBonds/Purchase Contract

Loan/Financing Agreement

Loan Payments

Trust Indenture

501(c)(3) Status

• Qualified 501(c)(3) bonds

– Tax-exempt “private activity bonds”

– issued by a state or local government

– proceeds loaned to and used by a 501(c)(3) organization in furtherance of its exempt purpose

501(c)(3) Status

• 501(c)(3) organizations– Organized and operated exclusively for exempt

purposes (“no private benefit”)– No part of the net earnings may inure to the benefit of

private shareholders or individuals (“no private inurement”)

– Not engaged in substantial lobbying activity– Not engaged in political campaign activity– Evidence of 501(c)(3) status

• IRS Determination Letter• Group Ruling Letter

Basic Requirements of IRC Section 145

Ownership Requirement◦ Property financed by the net proceeds of qualified

501(c)(3) bonds must be owned by a 501(c)(3) organization, a limited liability company whose sole member is a 501(c)(3) organization or a state or local government

Use Requirement◦ At least 95% of net proceeds of bonds must be used

by (i) a 501(c)(3) organization engaged in exempt activities, (ii) a limited liability company whose sole member is a 501(c)(3) organization or (iii) a state or local governmental unit

How Construction Projects are being Financed

47% Existing Cash Reserves

30% Operations

18% Tax-Exempt Bonds

The Focus of this presentation is to identify business initiatives that will assist you in preparing for the future.

The business initiatives suggested will improve your bottom line and offer new financing opportunities.

Market Future

Health care Beyond Reform… It’s about:

More but smarter health care;Earlier health care;Health care Where, When and

What you need.

Read more here: http://www.imaginewhatif.com/

Market Future

Market shifts:Care moving closer to homeReimbursed for OutcomesHigher out of pocket expensesIncreased numbers of un-

insuredFewer Hospitals

Market Future

Market Future

1,329 Critical Access Hospitals as of 2013 providing care to approximately 2.3 million people, mostly Medicare, for approximately $8.3 billion in payments from CMS.

849 CAHs (64%) would not qualify if required to re-enroll in Medicare.

Rural Health Care of the Future

When does 0 = +7% increase?

Market Future

When your Partner budgets.

Baseline budgeting is Previous year + Inflation + % of population growthThen they battle for budget increase

“facility fees are built into the way Medicare and commercial insurance plans pay for health care.”

Read more here: http://www.kansascity.com/news/special-reports/_news_special-reports_doctors-inc_/article334895/Day-2-Facility-fees-add-billions-to-medical-bills.html

Medpac

How Cost Is Determined

Independent Physician $72.50 to see patient under Medicare

Hospital Owned MOB yields a Physician fee of $49.70 and a facility fee of $73.68 for the same patient.

Data Mining for New Revenue

Read more here: http://www.kansascity.com/news/special-reports/_news_special-reports_doctors-inc_/article334895/Day-2-Facility-fees-add-billions-to-medical-bills.html

How Cost Is Determined

Market shifts:Community Care Networks Life Guides Health Coaches Navigators

New ways to involve Volunteers

Business Strategies

Market AwarenessGrowth TrendsDemographicsService Availability

Clinical Business StrategiesFacility Master Plan

Business Strategies

Master Facility Plan

• Long Term Planning adds Value • Capital Needs and Long Term Spending

Plan– Include Replacement Costs– An Understanding of Cost of

Occupancy– Tie to a business plan for service

• Performance Based Decisions– Plan for Change– Benchmark performance

Master Facility Plan

Once you have Facility Master Plan, recognize:

It’s a living documentYou have to WORK the planIt’s time sensitive

Business Strategies

Space Allocation / UtilizationSynergiesRedundant OperationsLocationAdaptability

Staff Reductions of 30% or moreSpace Reductions of 50%Predictive Analytics for Improved Utilization

Business Strategies

You need to look at what you do and build the case for profitability in your outcomes.

Business Strategies

The reality of what we do – Our job can be outsourced!

The reality of Outsourcing – The Company taking your job will make a profit.

Business Strategies

Profit Opportunity Areas:Facility maintenanceHousekeepingGroundsDietary / Café / Food ServiceLaundry

Business Strategies

Profit Opportunity Areas:Facility maintenance Control your utilities Contract Service vs In-house Management fee for off-campus facilities Repurpose / Reduce SF

Business Strategies

PMG controls:Property Management ServicesProperty Group – Space Allocation

and UtilizationDevelopment – capital constructionManagement – lease and 3rd party

operations

Property Management Group

Property Management Group

The Mission Statement drives business

The Property Management Group provides

the physical environment for the business

service to happen

Note the “BLUE BOXES” these are the

the key groups that must have a business

plan. The FM plan brings reality to the

business plans of the patient care

providers

Left side represents Landlord tasks

Right side establishes parameters for

success

Property Management Group

To effectively work the importance of real estate, property development, and facility operations needs to be at the Administration level where the “C’s” are.

We recommend the Chief Financial Officer be the leader of the Property Management Group. Typically this person will understand costs and be more able to relate a cost benefit analysis to an Administrative Group.

In most cases the Facility Manager becomes the person responsible for the implementation of the Property Management Group’s initiatives. The Facility Manager, being the end user, acts as the “Landlord” of the real estate owned and developed by the Organization.

A Clinical Representative should always participate in the PMG. This person acts as the liaison between the PMG and Tenants.

Property Management Group

Property Management Group

PMG Specific Results• Reduced 10 Year Master Plan costs by

$25,000,000• Reduced Energy Costs by Approximately

$750,000 Annually• Reduced Annual Work Order from 21,000+ to

14,000+• Maintenance Staff Efficiency from 75 percentile

to No. 1 out of 561 hospitals.• Added $1m annually in MOB reimbursement

Questions?