A Presentation to:
Capital Projects and
Critical Early Steps
Kurt Apfelbacher, Doughterty & Company
Mitch Kotrba, North Valley Health Care
Dough Montgomery, Eide Bailly
June 27, 2011
Introduction: About the Presenters
►
Kurt Apfelbacher – Vice President, Dougherty &Company
Provider of capital financing for acute and long term care
facilities
►
Doug Montgomery – CPA, Eide Bailly
Provider of forecasting, planning and audit services
►
Mitch Kotrba – Chief Financial Officer, North Valley
Health Center
Critical Access Hospital located in Warren, Minnesota
2
Where to Start?
►Problem:
►Step
Our facility limits our ability to deliver the best
healthcare to our patients
1: What now???
Contractors
Architects
Market Capture Rate
Accountants
Design Build
Construction Management
Feasibility Study
New Service Lines
Debt Service Coverage
Debt Capacity
Risk
Days Cash on Hand
Replacement vs. Renovation
75% Test
Long Term Debt
Bonds vs. Loans
Bankers
Public Opinion
3
Where to Start?
►After
identifying the need for an updated facility, the path to
completion gets a bit murky – it is overwhelming with
options and filled with unknowns.
►Need
for a clearly defined path to completion
►Working
with experts in their respective fields can help
hospital administrators and board members to best position
themselves to develop a properly sized facility and
ultimately access the capital markets.
►Chicken
vs. Egg: Modeling a project is an iterative and
interactive process
4
Key Questions
►
How much can we afford to spend?
►
Has our target market changed?
►
Should we renovate or replace our facility? How?
►
How are we going to pay for this?
►
What happens to my bottom line in the future?
5
How much can we afford to spend?
►
It sounds like a very basic question:
“How much can we afford to spend?”
►
A debt capacity analysis will look at historical and
projected financial performance and back into an amount
of debt that an entity can comfortably support.
►
Relatively inexpensive, compared to the cost of an overdesigned facility
►
Provides framework for ongoing discussion of what the
options are for the new facility
6
Debt Capacity
►Working
with Eide Bailly, North Valley Health Center was
able to determine a rough construction budget to give
framework to the ongoing discussion of how to build the
facility that it needed.
►Eide
Bailly drew from North Valley’s historical
performance and modeled the following assumptions:
►
Critical Access capital reimbursement
►
Long term financing options
►
Costs of development (construction, design, equipment, interest
during construction)
7
Debt Capacity
►Provided
NVHC with debt service coverage calculations:
8
Debt Capacity
►By
looking at projected affordability NVHC could back into
a prospective budget:
Estimated Uses of Funds
Construction Costs
$
Site Development
10,535,000
878,100
Architect, Engineering, and Other Fees
1,158,300
Equipment
1,328,300
Contingencies
161,747
Financing Costs
450,000
Capitalized Interest
488,553
Total Uses of Funds
$
15,000,000
9
Has our target market changed?
►Many
CAH’s have been performing healthcare services to
their constituency for long periods of time.
►While
certain core services are essential to any rural
hospital, the focus on outpatient services is drastically
different from when an older facility was designed
►Key
question: Who are we designing this facility for and
what are their healthcare needs?
►A
market assessment will help a CAH to understand the
patient outflow migration and to be able to tailor the
services offered in its new facility.
10
Market Assessment
►By
strategically capturing existing demand within its service
area, a CAH is able to maximize its revenue stream.
►Keeping
major high margin services like outpatient surgery,
endoscopy, imaging in-house, a CAH is able to dramatically
increase captured revenues
►Conversely,
the market assessment will illustrate that
procedures associated with high overhead, such as LDRP
rooms, may not be desirable features in the new facility.
►By
pulling data by a CAH’s primary market area, it is able to
tailor the services that are offered– and design the building
accordingly
11
Should we renovate or replace our facility? How?
► After
determining the needs of the hospital’s market area, the
issue arises of whether the current facility can be updated or a
replacement is necessary
►A
key member of the development team is a firm that is familiar
with facility assessment and master planning for Critical Access
Hospitals
► By
teaming with a firm with engineering background a current
facility assessment can be completed, which gives an accurate
idea of what updates are necessary – and the associated costs.
► Quantitative
comparison of replacement vs. renovation.
12
Facility Assessment & Space Programming
► Since
CAH’s are reimbursed by Medicaid for space that is
allocated to revenue producing cost centers, it is imperative that
the space plan is allocated accordingly
► We
have seen significant swings in revenues based on allocation
of space on a department by department basis
► Proper
sizing and utilization need to be planned for, whether a
renovation or replacement project is undertaken.
13
Facility Assessment & Space Programming
► North
Valley has worked with its owners representative, Yanik
Companies to assess its current facility
► It
was found that given the extreme challenges of the current
facility – including infrastructure work, inpatient focus and
limitations at the current site – that a new facility would be the
cost effective choice.
► In
addition, a CAH must consider the amount of interruption that
a yearlong building project will cause to their current facility if
remodeling
► Yanik
estimated that a renovation/addition would cost up to 25%
more than constructing a new building
14
Facility Assessment & Space Programming
►North
Valley has developed a space program in conjunction
with Yanik and its architects, Horty Elving, to maximize the
allowable reimbursement of the new space.
►By
making these adjustments upfront, North Valley will
realize financial benefit in both its operational performance
and in securing financing.
►By
planning for functionality and efficiency, a hospital can
also realize significant cost savings by staffing efficiencies.
15
Facility Assessment & Space Programming
► North
Valley has developed
a space program in
conjunction with Yanik and
its architects, Horty Elving,
to maximize the allowable
reimbursement of the new
space.
► By
incorporating the these
concepts, North Valley will
realize financial benefit in
both its operational
performance and in securing
financing.
16
How are we going to pay for this?
► Planning
how a hospital will pay for the facility is one of the most
essential early steps in the realization of the project.
►A
hospital should work with their banker early on in the process to
identify and evaluate suitable financing options.
options require significant financial planning and lead time – in
some cases up to one year.
► Many
► Each
option will have tradeoffs with rates, amortization, covenants,
reserve requirements and risk – important to weigh all of the factors
► The
hospital will want to prepare its “credit profile” in advance of the
building project to have access to the most efficient capital sources
17
Financing Options
►
Non-Rated Bonds
►
FHA 242 Mortgage Insurance
- Tax-exempt bonds
- Taxable GNMA backed securities
►
USDA – Direct & Guaranteed Loan Programs
►
Variable Rate Bonds – Letters of Credit
►
Tax Exempt Bank Placement
►
County Backed G.O. Bonds
18
Financing Options
►North
Valley has evaluated several options including
USDA, County Backed G.O. Bonds and Non-Rated
Revenue Bonds
►Currently
multi-tracking three methods of finance.
►Working
with Dougherty & Eide Bailly to measure long
term costs of various debt structures.
►Hope
to have final resolution this summer.
19
What happens to my bottom line in the future?
► The
biggest questions that hospital administrators and board
members are related to the bottom line and the long term
sustainability of the building plan.
► Working
with hospital staff, your accounting firm will generate
an examined (or compiled) financial forecast that will project out
5 years from the present
► Uses
a simulated cost report for each of the forecasted years to
show the impact of the new facility – and any increase in
revenues and expenses over the term
► Used
as a tool for management and budgeting and as a document
that illustrates project feasibility to investors
20
Financial Forecast
► North
Valley is currently working with Eide Bailly to finalize
their examined financial forecast
► Iterative
process with all parties involved
► The
forecast will be used in the application process for Federal
loans – and to determine if tax-exempt bonds are an appropriate
long term choice for financing.
► Using
base forecast and changing variables to be best structure
the long term financing and space plan
► Outstanding
tool to simulate future performance, giving both the
staff and board comfort in its decision to replace.
21
Summary – Key Steps
►Affordability:
Debt Capacity
►Service
Market Assessment
Area:
►Need
& Design:
Space Planning & Cost Estimating
►How
to Pay:
Financing Options
►Roadmap:
Financial Forecast
22
Questions?
23
Contact Information
►
Kurt Apfelbacher – Dougherty &Company
[email protected] – (612) 376-4083
►
Doug Montgomery – Eide Bailly
[email protected] – (952) 918-3593
►
Mitch Kotrba – North Valley Health Center
[email protected] - (218) 745-3261
24