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What CAHs need to consider when planning capital investments

Having worked in rural health care for 25 years, Brian Haapala of Stroudwater Capital Partners understands the challenges critical access hospital executives, board members, and stakeholders are up against when it comes to internal needs for capital. With the current trend of rising interest rates, it is easy to understand why the decision to pause on a major capital investment can feel like the only safe solution.

Construction cost inflation for health care projects increased 17 percent per year from 2021 to 2023, largely behind the scenes and undetected by CAH leaders. Prior to this period, costs increased at an average of 2.1 percent per year, so the recent experience reflects increases more than 8 times the typical changes. Year to date, costs have stabilized and are down slightly (1 percent). With billions of dollars in deferred capital needs, further delaying capital projects that reinvest in rural health infrastructure comes at a significant cost.

Taking a step back and can help hospital leaders consider a different perspective – one backed by research that benefits continued progress rather than getting stuck on a fear-driven pause.

In Haapala’s latest white paper, Navigating a Rapidly Changing, Rising Rate Environment, he documents and discusses analytic findings  showing that interest rates are not the most critical factor affecting project feasibility for CAHs and cost-based payments offset some of the impacts.

The research reflects several key factors as cause for moving projects forward, including the importance of properly sizing projects to meet community needs, addressing health care construction inflation promptly, and creating a financing plan that gets the project off the ground and allows for refinancing of debt when the market improves with lower rates in the future.

Other takeaways include:
  1. The Hill-Burton program played a crucial role in developing health care facilities, particularly in rural areas. However, many of these facilities are now outdated and require substantial reinvestment. This shows the importance of regular updates and modernization in health care infrastructure to meet the changing needs and challenges of today.
  1. USDA's Community Facilities program offers grants and loan programs with below-market rates to assist CAHs in upgrading their facilities. The primary factors associated with accessing these resources are interest rates and terms, total project costs, cash flow, and the overall mix of cost-based payments. This highlights the significance of favorable financing conditions and adequate financial resources for CAHs to meet their community needs.
  1. Despite the recent rise in construction costs and interest rates, planning for capital investment remains essential for CAHs. The debt service coverage ratio is an important metric to evaluate the feasibility of a project, and even with increased interest rates, CAHs can still maintain a sustainable plan for loan repayment. This emphasizes the need for careful financial analysis and planning when considering capital investments in the health care sector.
  1. The analysis demonstrates that interest rates and project costs are less influential factors in the feasibility of a project compared to cash flow and the cost-based payer mix. This suggests that CAHs should primarily focus on optimizing their financial resources and ensuring a sustainable cash flow to support long-term capital investments.
You can contact Brian Haapala to further discuss these considerations.

NRHA adapted the above piece from Stroudwater CPIa trusted NRHA partner, for publication within the Association’s Rural Health Voices blog.

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