County Critical Access Hospital Wins Facility Analysis and Much More
At first, this hospital in rural Nebraska seemed like a bump on a small-town road. This Critical Access Center needed to be updated, expanded and otherwise changed to accommodate the shift from in-patient to outpatient care. However, this county facility lacked funding. That’s why I was there. The hospital had won a drawing that the firm with whom I was a Principal had sponsored at a trade show. They would receive a site analysis by three professionals; one an engineer reviewing systems, a former administrator looking at operations with me and my additional role of architectural and financial review. We conducted a two-day on-site visit that resulted in an extensive report, valued at $5,000. We did this as the prize won in the trade show drawing. We then competed against other firms in an effort to win the project that resulted. To win, our initial analysis would need to tell them a lot that they didn’t already know.
In preparing for their future, one of the advantages that nonprofit hospitals and care organizations have is grant writers. They act quickly and are able to assemble comprehensive information about the financial health and the board. Though this is public information, we sought out as much as could be gleaned – the interpretation of which would end up greatly benefitting the hospital.
The CEO and CFO hosted us for the entire visit. Seven of us sat down together to look at their current vision for the facility. We toured the existing facility and got a handle on the context. We did our homework, learning about the community and the county.
This was all part of a Physical-Functional Analysis. We considered the condition and age of the building, the operations and their efficiencies. In terms of spaces, we looked at the diagnostic center, lab, nursing, med surg beds, short term patient beds, on-site physical therapy, the admin suite, and the back-of-the-house services like laundry, supply system, and kitchen.
We considered the adequacy or inadequacy of the architecture, heating and cooling, and IT infrastructure. In light of the medical environment of the past, present and future, what didn’t fit anymore? One thing that was immediately clear: A lot of space was taken up by beds they didn’t need and that didn’t generate revenue.
After our presentation to the C-Suite and the board, the hospital’s CPA felt he would be willing to support up to $1.5M in capital improvements and that’s where the story starts.
With our Physical-Functional Analysis, the hospital could now go to any architect anywhere. We would be competing with others for the job. So, we took five actions that no one else thought to take.
1. Questioned Assumptions
The hospital had been told that one wing that was a double load corridor had a load-bearing wall that wouldn’t allow much change to that area of the facility. It turned out to be a beam and several columns; therefore, we could open up that whole wing for adaptive re-use and save the hospital money.
2. Developed Ways to Generate Money
The hospital knew it needed to fix its cafeteria, laundry and kitchen, but they only had $1.5M! We said, ‘What if we work on ways to generate money first? These areas don’t currently generate revenue; the outpatient surgery and rehab do and that’s going to cost more than we have.’ This is where I put on my MBA Finance ‘hat’ and, with the hospital’s permission, went to the local bank. At the time, financing costs were 6-7%. The hospital was the major employer in the town. My question, ’Would you consider a credit enhancement of their loan?’ In effect, the local branch of the bank would co-sign the loan and the percentage went down.
3. Motivated Others to Help
We then asked the bank, ‘If we did bond financing, would you be interested in selling the bonds?’ Yes, of course. They would get paid for selling bonds, they knew who to sell to, and could become heroes in the community and get credit for doing this.
4. Went the Extra Mile(s)
We then went to that bank’s home office in Omaha, introduced ourselves to the Chief Executive Officer, and asked, ‘Would you be interested in doing a credit enhancement of the loan, too?’ This would be a credit enhancement of the credit enhancement.
‘It can’t be done,’ the CEO said.
‘Why not?’ we asked. ‘Just because it hasn’t been done doesn’t mean it can’t be done.’
They checked and, sure enough: ’We can do that!’ The lending rate went down to just over 3%, which meant the CPA would support the hospital’s ability to do the project for a higher amount.
5. Provided Financial & Operations Analysis
We looked at where they were leaking money and where they could be more efficient. There was a 24-hour ‘ask a nurse’ program, the result of a grant that had expired. It was staffed with licensed nurses working three shifts at an annual cost of approximately $300,000. The county had a great deal of pride in having put the program together.
I said, ‘Let me ask if the county will take it back.’
They said, ‘But that’s goofy, it all comes out of the same pocket.’
‘It wouldn’t be on your balance sheet anymore, though.’
My question for the county: ‘Would you be willing to be the heroes and save this program?’
They put it elsewhere, so that freed up $300K annually to the bottom line. We found other operational changes that further reduced costs – increased debt service capacity. Think of a home; you could leverage a lot of house for that.
Under this plan, the hospital’s CPA revised what they could afford, with more debt service capacity and the lower interest rates that result from the credit enhancements, to $8M. (We also applied for other grants – successfully – and generated additional funds.)
It took an architect’s creativity applied to a financial challenge to come up with creative solutions.
The hospital awarded us the project and they obtained a significant addition, which came in at just under $8M.
We had one more paradigm-shifting idea for the hospital.
This was a small town with few facilities. ‘Why not do an outside entrance on the cafeteria,’ we said, ‘and use it for wedding receptions, Sunday-after-church lunches for the whole community, proms and more?’ The hospital loved it and did exactly what we recommended. They now had both an outreach vehicle and an additional revenue source.
This was a financial + architectural + operations solution, my specialty. As for me, I felt like the Lone Ranger, riding into town, cleaning it up, riding off into the sunset with them asking … ‘Who was that masked man?’