Provides for the refinancing of indebtedness and additional secured borrowing by certain not-for-profit hospitals

Section 12 provides that Medicaid reimbursement for interest on debt refinancing shall be subject to availability of federal financial participation and that the refinancing of a mortgage loan shall not alter, affect or change the component of Medicaid rates applicable to the depreciation of any asset or assets.

Section 13 provides that bonds and loans issued pursuant to this act will survive the expiration of the act. Section 14 provides for an immediate effective date, and provides that the act will expire on November 30, 2010.

Existing law

The refinancing of existing indebtedness by, and the issuance of new debt to, secured hospitals is currently not permitted as the statutory authorization has expired.

Justification

The bill is intended to permit "secured hospitals," and particularly, two not-for-profit hospitals, previously designated as "financially distressed," to refinance existing debt and issue new debt upon a demonstration that the refinancing is undertaken far sound business purposes and will help improve or maintain the hospital's financial condition. The "secured hospital loan program" was established to provide additional support for hospitals identified by the Commissioner of health and the Public Health Council as (i) facing financial distress attributable to significant levels of uncompensated care, and (ii) nonetheless necessary for the health and safety of vulnerable populations who otherwise would not have adequate access to essential services. That program successfully allowed these safety net facilities to make the capital investments necessary to continue to serve these populations. While the program expired in 1998, participating facilities have continued to carry the related debt.

There have been substantial changes in the health care industry since the program expired, including rapidly increasing health care costs and dramatically declining hospital margins. In order to continue to maintain the State's safety net facilities through these troubled times, the Legislature and Executive have, on occasion, revived the secured hospital loan program to allow secured facilities to restructure their debt. This occurred most recently in 2006.

This bill represents another reopening of the program to benefit two hospitals that participated in the original program. These facilities have faced unusual challenges in recent years, related not only to the financial difficulties traditionally facing safety net facilities, but also to significant closures in their service areas that have drastically increased the proportion of uncompensated care they must offer, and that necessitate additional capital investment. Accordingly, the bill not only allows the refinancing of their existing debt under the program, but also the issuance of new debt. Loans made pursuant to this bill may be used for payment of total hospital project costs, payments of amounts outstanding on existing mortgage loans, repayment of restructuring loans, payment of operating costs associated with expansion of capacity to address hospital closures, refinancing of capital expenses initially funded from operations, payment of arrears to employee benefit funds, payment toward professional liability premiums or unfunded professional liabilities, payment of accumulated historic bad debt and charity care losses, purchase of an eligible secured hospital borrower's outstanding special hospital project bonds, or purchase of ancillary facilities financed by other debt of the eligible secured hospital borrower or a related entity.

In short, the bill is intended to accomplish two objectives. First, through prudent refinancing of debt, it will allow the designated eligible secured hospital borrowers to increase cash flow, pay down aged payables and otherwise improve their operating position. Second, the bill has been carefully structured to accomplish these benefits without unduly burdening the State's Medicaid budget. To this end, refinancing borrowers must enter into a "Medicaid hold harmless" agreement with the Commissioner stating that they will not claim additional interest or depreciation reimbursement beyond amounts that would have been paid under the preexisting mortgage loan. Thus, the bill utilizes a proven mechanism to improve the financial condition of the designated hospitals without inappropriately burdening the State.

Prior legislative history

New bill.

Fiscal implications

There will be no fiscal impact to the State absent a default, which has never occurred in the Secured Hospital Loan Program.

Effective date

Immediate.