PUBLIC/PRIVATE PARTNERSHIPS IN HEALTHCARE
In Texas, a controversial “Trans-Texas” toll road is structured as a “Public/Private Partnership”. In Georgia, over $30 billion of highway improvements are financed and managed in the same way. In Connecticut, a public/private partnership funds billboards for Amber Alerts. In North Carolina, school buildings are funded and built in the same fashion.
The concept of joining together private market capital and management with governmental entities to address public infrastructure needs is well-established in water systems, waste water facilities, transportation and is now moving into real estate and facilities on a national scale.
There’s one glaring area missing: Healthcare and Hospital Facilities.
Critical Access Healthcare was formed to pioneer the concept of public/private partnerships with governmental entities to improve the access to scarce capital for replacement, renovation or improvement of rural healthcare facilities.
PUBLIC/PRIVATE PARTNERSHIP PROTOTYPE
The prototype public/private partnership we are currently working with is a Design/Build/Finance/Operate (DBFO) model. A typical situation involves a hospital-owned facility that is struggling financially due to poor metrics, management and lack of access to capital.
In most circumstances, the Hospital District board has tried a number of ways to access financial and operational expertise to replace an old and obsolete facility or renovate to add new services and capture out-migrating market share. The board may have explored public bond issuance and been concerned about the local community’s support as well as the credit and bond ratings on the hospital.
The board has likely talked to any number of consultants about applying for either a HUD 242 loan guarantee or a USDA loan guarantee. They may have discovered the feasibility phase takes up to a year and costs a lot of money. Then, with a low likelihood of success, they discover they can’t get the loan guarantees for an additional year.
The community needs a new or renovated hospital. The board needs help. It may need access to up to $25 million of capital and some financial and operational assistance to pull all of the above together. It’s simply too complex for their hospital administrative team to accomplish. Enter Critical Access Healthcare.
Critical Access Healthcare, LLC, comes in as a strategic partner and brings private or public market capital to the table to build replacement facilities or renovation to increase services and market share. We bring over 25 years of experience in hospital operations, ranging from 25 beds to 1,000 in size and we pioneered the Public/Private Model in Rural Healthcare. CAH becomes strategic partners with the district in owning, operating and governing the hospital. We secure the financing and manage the construction process to bring the project to completion, continuing as partners with the district going forward.
HOW DOES THE DBFO MODEL OF PUBLIC/PRIVATE PARTNERSHIP WORK?
CAH and the Hospital District enter into a series of agreements as follows:
- A new company is structured to own and operate the hospital
- The District has rights to appoint the Board representation
- CAH assumes management of the hospital and indigent care
•CAH works to improve the financial performance and credit-worthiness of the Hospital
- Financing is obtained for the replacement hospital
WHAT KIND OF SITUATION WORKS BEST FOR ONE OF THESE TYPES OF PUBLIC/PRIVATE PARTNERSHIP MODELS?
The higher the Medicare and Medicaid days as a percentage of total days, the better these types of arrangements work for rural critical access hospitals. High levels of self-pay and indigent combined with low levels of Medicare don’t work as well.
The Hospital District needs to have tax support to commit to the County needs in order to make a model work well.
WHAT HAPPENS TO THE HOSPITAL DISTRICT BOARD, THE TAX REVENUE AND THE INDIGENT PROGRAMS?
Unless there’s a sudden solution to the indigent care problem in the County, the hospital still needs tax revenue to survive. The Hospital District board stays in place, taxes are collected and members of the board can serve on the new hospital board of directors. In several of our locations, the EMS stays with the district because it is easier for the district to qualify for grants. CAH, operating through the new hospital partnership, assumes management of the indigent care program for the district.
WHAT HAPPENS TO EXISTING MANAGEMENT?
If management has been doing a good job running the day-to-day operations of the hospital, then both parties agree to keep them. CAH has experience running over 45 hospitals over the last 25 years. We bring advanced systems and management structures to hospitals and can help struggling management teams succeed.
WHAT ARE THE NEXT STEPS IN CONSIDERING A PUBLIC/PRIVATE PARTNERSHIP WITH CAH?
First, the parties become acquainted with each other, making sure each has the same vision and values. This is a strategic partnership and the parties must work closely together to make the project work.
Second, we need to look at a number of metrics to make sure that something like this works for your hospital. If it does, there must be a non-binding Letter of Intent and some preliminary due diligence before sitting down with the board to work through the numbers and structure.
Finally, once everyone is comfortable, we do detailed due diligence and begin drafting definitive documents. The process generally takes 120 to 180 days from start to completion. In our last partnership model, CAH stepped in and took over management of the hospital during this period of time to immediately implement improvements to operations and fill vacant management positions.