LAHARPE — If there were an end-of-life program like hospice for aging facilities, Allen County Hospital would need to enroll.
“Your hospital is at the end of its useful life,” was the diagnosis by Chuck Wells, a consultant who specializes in the financing of rural hospitals and was recently hired by Allen County Commissioners.
In Wells’ opinion, the only way to save the hospital from “sliding into oblivion,” is to build a new facility, rather than renovate.
Wells addressed a crowd of about 115 citizens Tuesday night at LaHarpe’s city hall. The public forum included elected officials of area cities.
Several things are currently in the county’s favor to build a new hospital, Wells said.
Perhaps overlooked by its citizens is that as host to Allen County Hospital, Iola is a “nice place to live,” said Wells. In the 30 years that he has done business off and on with Allen County officials, “I’ve always enjoyed the feel of your town,” he said.
The timing also is right for the undertaking.
Construction costs are low, interest rates are low, and the need is high, he said.
Wells gave examples of construction costs of a recent hospital in Nebraska at $256 a square foot; in spring 2008, a similar-sized hospital in northern Iowa was built at $320 a square foot.
“Construction costs are down hugely,” Wells said as a result of the still-depressed economy.
Likewise, lending rates remain low. Wells estimated financing could be attained at 4.25 to 4.50 percent interest — “a relatively low cost of capital,” he said.
Knowing how long the economy will stave off rising inflation is anyone’s guess, he said, but it’s unreasonable to expect the low rates to continue forever.
The hospital’s aging physical structure is such that a catastrophe is waiting in the wings, said Steve Lewallen, CEO of the Health Facilities Group, also hired by the county to assess whether the hospital should renovate or build anew.
Lewallen said the building’s needs are “extensive,” including antiquated water lines and many components that are 50-60 years old. Updating these features would not bring the hospital in line with today’s medical needs because of the structure’s limitations, Lewallen said.
And as far as financing goes, attracting investors to buy into a new facility is significantly easier than to plow money into an old one, Wells said.
“It’s easier to finance $30 million than $3 million,” he said.
That’s the price tag Wells put on what a new hospital would cost the county.
The sticker shock was softened by a number of factors that proved it was financially viable.
First is that Allen County Hospital is designated as a critical access hospital, which means that for its Medicare patients, those 65 and older and the disabled, the hospital is reimbursed at 101 percent of costs for their care. With a patient load of more than 50 percent qualifying for Medicare, that puts the hospital in a money-making position.
Larry Peterson, ACH finance manager, said about 61 percent of those who stay as patients at the hospital are on Medicare. Of outpatients, typically a younger age set, about 48 percent receive Medicare benefits.
Of the country’s estimated 6,000 hospitals, 1,286 are designated critical care access, Wells said. Though the benefits of the designation are profitable, they represent only 3.5 percent of Medicare expenditures, Wells said, and are not in danger of losing their beneficial designation.
CRITICAL TO THESE assumptions is that the hospital gets out of its lease with Hospital Corporation of America.
“Am I correct in saying that we’re more like a landlord,” Commission Chairman Gary McIntosh asked.
Wells confirmed the analogy.
For $1 in “rent,” HCA manages the hospital and reaps the profits. But if something major is needed done to the hospital, such
as new water lines, the county would be on the line to make the upgrade.
The arrangement frees the county of having to make operational decisions, but on the other hand, denies it any financial reward, hamstringing commissioners when a major capital improvement is needed, such as now.
Wells proposed the county get out of its lease, which can be done with a six-month notice.
Alan Weber, Allen County counselor, estimated the county would need to pay HCA $1.5 million for its investment in equipment for the hospital if it were to terminate the lease agreement.
Wells said HCA has voiced interest in managing the hospital, to which a number in the audience applauded.
Wells advised that a number of companies, including Via Christi, Quorum, etc., be asked to make management proposals.
Essential to good management is “a good board of directors who picks a good CEO and then lets the CEO run the hospital,” Wells said.
From there, services can be contracted from management companies on an ala carte basis. Installing electronic medical records, for example, can be contracted from a company. By 2013, all hospitals must be equipped with the technology according to a federal mandate.
“You’re not even on first base,” Wells said of the hospital’s progress toward that update.
ENDING THE LEASE with HCA puts the hospital at a cash balance of “zero,” Wells said.
He estimated $5 million would be needed for “balance sheet restoration” and give the hospital “a running start.” Local banks would be the best source of that funding, he said.
Another $25 million would be needed to build a new facility. Wells estimated construction would take 18 months. All in all, the timeline would be two and a half years.
He advised county commissioners issue public building commission bonds, such as they did for the construction of the county jail in 2003. These bonds are backed by the county if hospital revenue isn’t sufficient to meet debt service. That has never happened with the law enforcement center.
“The target is $3.6 million,” annually to service the debt, Wells said this morning in a telephone
conversation with The Register.
He identified three sources of funding.
The hospital’s designation as being critical access plays a big role in the financing of the debt. In addition to 101 percent reimbursement for the care of Medicare patients, if the hospital were to build anew or renovate, the federal government would help pay toward the interest and depreciation, starting at about $1.3 million annually.
ACH currently generates about $1.6 million in profits on an $18 million budget. It needs another $750,000. Wells advised commissioners to ask for a tax.
A countywide half-cent sales tax would generate almost $900,000, Commissioner Dick Works said.
Wells estimated it would be needed for no longer than 10 years.
The hospital currently attracts only 40 percent of its potential market share, Wells said, to which the hospital’s CEO, Joyce Heismeyer, concurred.
In the county of Atchison, population 16,481, its hospital makes $32 million annually in revenue, Wells said. Likewise, the hospitals in Chanute and El Dorado are “very, very profitable,” he said, and now operate without tax support.
Wells said potential exists for ACH to gain a 60 percent market share, which will happen sooner if it were to secure a resident surgeon. Wells estimated the hospital could achieve $30 million in annual revenues.
A HOSPITAL’S appearance has a great deal to do with its success, Wells said.
“That’s the culture we live in. People today judge quality based on appearance. People judge what they can’t see, such as performance, on what they can see.”
Location is also crucial.
Wells gave the example of Neodesha’s new hospital — conveniently located at the intersection of U.S. highways 400 and 75.
“It’s a billboard for itself,” Wells said.
Iolan Skip Becker questioned whether a county with a declining population needed a new, all-inclusive hospital.
It’s all or nothing, Wells said. A hospital cannot receive federal funds if it offers only piecemeal services.
