Fiscal Impact Statement: Resolution to Approve Contract
Regarding Greater Southeast Community Hospital submitted by Chairman
Vincent C. Gray at the request of the Mayor
Government of the District of Columbia
Office of the Chief Financial Officer
Natwar M. Gandhi
Chief Financial Officer
1350 Pennsylvania Avenue, N.W., Suite 203
Washington DC
20004
(202) 727-2476
www.cfo.dc.gov
MEMORANDUM
TO: The Honorable Vincent C. Gray, Chairman, Council of the District of Columbia
FROM: Natwar M. Gandhi, Chief Financial
Officer
DATE: October 23, 2007
REFERENCE: Resolution to Approve
Contract Regarding Greater Southeast Community Hospital submitted by
Chairman Vincent C. Gray at the request of the Mayor
Conclusion
Funds are sufficient in the FY2008 Budget and the
FY2008-2011 Financial Plan to enter into the proposed partnership
agreement with Specialty Hospitals of America ("SHA"), as
contemplated by the East of the River Hospital Revitalization Emergency
Act of 2007 ("Act"). The Act allocated $79 million from the
Community Health Care Financing Fund1 to support the proposed
public-private partnership ("Partnership") that would invest
in the Greater Southeast Community Hospital ("Hospital").
The Office of the Chief Financial Officer has three
concerns:
1. Financial Stability of the Parent Company. SHA is not
in strong financial condition. The unaudited financial statements
provided by the parent company, SHA, indicate that SHA's liabilities
exceed tangible assets by approximately $34 million. (The unaudited
statements include as an asset approximately $34 million of good will.)
2. Financial Viability of Hospital Operations. The
five-year operating plan provided by SHA does not include sufficient
detail to ensure that the Hospital will be financially successful. In addition, the District will have limited
control over the $20 million Working Capital loan. Should the business
plan fail, it is likely that additional funds of substantial amounts
will be needed to keep the Hospital running.
3. Security of Loan Repayment. The District would hold a
first lien on the Hospital site and current improvements to secure its
investment. However, it will be necessary to partially release the lien
in order to allow future development of the Hospital site.
In summary, although funds are sufficient to make the
capital investment contemplated by the resolution, the full cost to
maintain a viable hospital may be considerably more due to these three
concerns.
Background
The Act authorizes the District to enter into a limited
partnership with Specialty Hospital of Washington-GSE Holdings, LLC, a
subsidiary of SHA, to support the only acute care hospital east of the
Anacostia River, which represents a critical part of the health care
infrastructure for more than 140,000 residents in Wards 7 and 8. The
District will provide $79 million to the Partnership, which will, in
turn, make loans to CMC Realty, LLC and Capitol Medical Center, LLC
(both newly created subsidiaries of SHA) for the purchase of the Greater
Southeast Community Hospital and its site, for the purchase of capital
equipment, and to provide working capital for Hospital operations. CMC
Realty will own the 17-acre site and on-site improvements. Capitol
Medical Center will own all other assets of the Hospital including
supplies, equipment, contracts, licenses, personnel and other business
operations.
As outlined in the agreement, the Partnership will
disburse the $79 million as follows:
- CMC Realty receives $30 million in
grants to fund capital equipment and renovations to the physical plant.
The District will receive 50 percent of the gain (net of the Hospital's
initial purchase cost) from any sale of the Hospital. The agreement does
not define the base from which to calculate a future gain from the sale.
- Capitol Medical Center will receive
$20 million in loans (called the Working Capital Loan) to fund working
capital. This loan will be repaid to the Partnership interest-free from
the Hospital's operating profit over a 10-year period at a rate of $2
million per year.
- Capitol Medical Center and CMC Realty will split $29
million (called Acquisition Loan) for the acquisition of the Hospital
and its site, including paying off notes of creditors of the Hospital's
current owners. This outlay will be repaid to the Partnership without
interest from payments equivalent to the real property taxes on the
17-acre Hospital site.
In return, CMC Realty will maintain and improve the
Hospital building, and the Capitol Medical Center will make the
necessary investment in Hospital operations to ensure that the Hospital
will have at least 150 short-term acute care beds, provide OB/GYN
Services, offer a round-the-clock emergency service that will operate,
by January 1, 2011, at Emergency Room Drop Time rates that are at or
below the DC monthly averages for the previous year. The Hospital will
also achieve full accreditation by January 1, 2009, and will improve its
operations to meet the national averages on a number of Joint Commission
performance measures, as specified in the agreement.
Financial Plan Impact
Funds are sufficient in the FY2008 Budget and the
FY2008-2011 Financial Plan to implement the proposed resolution.
However, three concerns may impact the District's Budget and Financial
Plan in the form of ongoing support that may become necessary to
maintain a viable hospital.
Concern 1: Financial Stability of the Parent Company
SHA is not in strong financial condition. Financial
information on SHA is extremely limited and based only on unaudited
summary data provided by SHA. As of August 2007, SHA's total liabilities
were approximately $87 million, while its total tangible assets were
approximately $53 million. (The unaudited statements include as an asset
approximately $34 million of good will.)
Concern 2: Financial Viability of Hospital Operations and
Ongoing Operating Subsidies
The five-year operating plan provided by SHA does not
include sufficient detail to evaluate whether the proposed operating
model can be realized and the Hospital will be viable. In addition, the
District will have limited control over the $20 million Working Capital
Loan. Should the business plan fail, it is likely that additional funds
of substantial amounts will be needed to keep the Hospital running.
According to the SHA operating model, the financial
success of the Hospital under Capitol Medical Center ownership depends
upon receiving licenses for up to 150 skilled nursing facility (SNF)
beds, additional long-term acute care hospital (LTACH) beds, and
increasing the Medicaid rates for skilled nursing facility patients at
the site. The Federal Government currently prohibits a single entity
from owning and operating both shortterm and long-term acute care
hospital beds in the same facility. This prohibition increases the risk
that additional funds will be needed to keep the Hospital running.
Concern 3: Security of Loan Repayment and Investment
Recovery
It is unclear that either the $20 million Working Capital
Loan or the $29 million Acquisition Loan can be repaid based on the
financial plan of the Hospital. Repayment of the $20 million will depend
on the profitability of the Hospital operations.
The $29 million loan is to be repaid solely from
site-specific taxes. The FY 2008 total assessed value of the Hospital
and the 17-acre site is approximately $65 million; however, payments are
required only on the land portion and any future improvements. The land
portion alone is assessed at approximately $9.9 million, which would
result in an initial payment of approximately $183,000. If received,
this payment would be far below the $967,000 annual payment necessary to
repay the $29 million loan. The underlying land value of the Hospital
will be reviewed annually as part of the Districtwide real property
reassessment process and will be adjusted as market conditions warrant.
However, the site would need to be substantially developed in order for
the land value and future improvements to result in payments sufficient
to repay the $29 million Acquisition Loan.
In addition, the loan is structured such that a portion
will be repaid by CMC Realty and a portion by Capitol Medical Center.
CMC Realty intends to sell parts of the 17-acre site for future
development once the District's lien is removed. To the extent that CMC
Realty repays its portion of the Acquisition Loan but Capitol Medical
Center does not, the District is at risk that CMC Realty will sell the
underlying security behind the original loan.
The District retains indirect control over the future
development of the 17-acre site through its lien on the property, which
the District may or may not release in its sole and absolute discretion.
In order for the District's $29 million investment to be repaid, the
site must be developed in a manner to assure that payments are optimized
prior to the District releasing its lien.
For example, granting a partial release of the District's
lien on the undeveloped portion of the hospital land, combined with
allowing ownership of the Hospital operations to be separated from
ownership of the real estate, places the District at a disadvantage in
the event that the Hospital operating entity is forced into bankruptcy.
1n such a bankruptcy, the District would be an unsecured creditor of a
debtor that has limited tangible assets.
Finally, we have no information at this time on the
relationship between the realty company and the hospital operations.
Without information on the lease arrangement, we cannot comment on how
the lease will impact the operations of the Hospital.
In summary, although funds are sufficient to make the
capital investment contemplated by the resolution, the full cost to
maintain a viable hospital may be considerably more due to these three
concerns.
1. To maintain tax-exempt status, Federal regulations
require that the tobacco bond proceeds in the Community Health Care
Financing Fund only be used for capital projects of the District.
Therefore, to the extent that it is necessary, the tobacco bond proceeds
will be used to make available Pay-Go Capital funds to support the
Partnership. Approval of a reprogramming is necessary to allow the
District to make all payments associated with its agreement with SHA.
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