Hospital gets $100M financing deal

Kalispell Regional Medical Center is on track to receive up to $100 million in tax-exempt revenue-bond financing to refinance the hospital’s existing debt and complete the Montana Children’s Medical Center.

The Montana Facility Finance Authority, which is administratively attached to the state Department of Commerce, provides not-for-profit health-care providers with access to low-cost capital in the form of tax-exempt bond financing and low-interest loans.

Kalispell Regional Medical Center presented a $97.5 million, 30-year stand-alone bond-issue request at the Authority’s June 19 board meeting. The board approved a resolution calling for the sale and issuance of revenue bonds, not to exceed $100 million. Adam Gill, executive director of the Montana Facility Finance Authority, said it’s not uncommon for the board to approve an amount higher than the requested financing to allow a buffer for cost overruns or unforeseen expenses.

There are a number of steps yet to be completed, Gill said. A public hearing required by the Tax Equity and Fiscal Responsibility Act must be held; then the resolution and evidence from the hearing go to the governor for a final certificate of approval.

Kalispell Regional should be able to close the financing deal sometime in September, he said.

“These are obligations of Kalispell Regional Medical Center, not the state or Department of Commerce,” Gill stressed. “Kalispell Regional is borrowing the funds. At no point are taxpayer funds on the hook for financing.”

A memorandum from the Montana Facility Finance Authority executive team to its board noted that Kalispell Regional “has had to work through several issues in the past 18 months.

“However, they are well-equipped to move forward, and this financing is a key part of that process,” the memo noted.

Kalispell Regional sought financing of $14 million in tax-exempt bonds through the Montana Facility Finance Authority in April 2017, according to a project narrative prepared by the Authority. That financing was delayed because Kalispell Regional disclosed it was under investigation by the Office of Inspector General of the U.S. Department of Health and Human Services and the U.S. Department of Justice regarding its financial relationship with certain physicians.

The federal investigation was spurred by a whistleblower lawsuit filed over a year ago by Jon Mohatt, chief financial officer for Kalispell Regional Healthcare’s Physician Network, which alleges illegal kickbacks and lucrative self-referrals that funded physician salaries far above fair market value. The 91-page civil complaint was filed under seal in May 2017 under the False Claims Act. The seal recently was lifted from the lawsuit, giving both hospital executives and the public the details of the allegations.

Kalispell Regional’s financial disclosure indicates the hospital has booked a $21.5 million “regulatory expense” as a reserve in fiscal year 2018 to settle the lawsuit, the Authority’s report noted. The set-aside includes $1.5 million in legal fees.

“Hospital management anticipates that the actual [settlement] payment will occur over six years in installments of approximately $3.3 million beginning in fiscal year 2019 and be made from operating cash flow,” according to financial analysis prepared for the state board.

Kalispell Regional told the Daily Inter Lake last week it has reached a settlement in principle in the whistleblower case.

Standard & Poor downgraded Kalispell Regional’s credit rating from A- to BBB last month due to reduced margins and an increased debt load, but the financial analysis for the bond financing states the hospital’s outlook “is stable and S&P is optimistic about the turn-around plan.”

Regarding the delay in financing in April 2017, the financial analysis stated “while the investigation was active it was impossible to make a reasonable assessment of the risk of adverse ruling or the amount of penalties that could be incurred.”

As a result, a planned private placement of $14 million in tax-exempt bonds through the Montana Facility Finance Authority was delayed, so the hospital instead received a $14 million line of credit from Glacier Bank to keep its days cash — the number of days an organization can continue to pay its operating expenses given the amount of cash available — on hand in line with the covenants of facilities revenue notes that were placed with Bank of America. That line of credit was paid back within days of it being issued, the Authority’s financial analysis indicated.

The hospital’s proposal states that $32 million of the bond financing would provide funding for the new Montana Children’s Medical Center. It would also refinance a bridge loan for that project of about $27 million. Further, it would refund facilities revenue notes that were placed with Bank of America, about $16.6 million, that have acceleration rights and more stringent covenants.

The bond financing also would reimburse Kalispell Regional for money spent on capital projects, about $14.7 million. It would fund a debt service reserve and pay the cost of issuing the bonds.

The Montana Children’s Medical Center will be the only facility in the state specifically designed for pediatric patients and their families, the Authority report notes. It will offer 24/7 pediatric surgery and neurosurgery.

Kalispell Regional recruited 35 pediatric subspecialists to the medical staff between 2015 and 2018, according to the report. The 190,000-square-foot children’s center is expected to open in the second quarter of 2019. Financing will provide funding for the exterior completion and first floor. That phase will cost about $60 million, which includes not only construction, but also medical equipment and furnishings, according to Mellody Sharpton, director of communications and marketing for Kalispell Regional Healthcare. The other two floors will be funded with philanthropic giving. The launch date and time-line for a public capital campaign have not yet been determined, Sharpton said.

Kalispell Regional presented hospital usage numbers spanning the last four fiscal years. It shows the number of hospital admissions grew from 7,336 in 2015 to 8,579 for fiscal 2018. The number of surgical procedures increased from 6,560 to 8,697 during the same time frame. Emergency visits jumped from 22,864 to 24,544 over four years, and the number of outpatient visits peaked at 216,830 two years ago but dropped to 195,870 for fiscal 2018.

The 2018 operating margins include a one-time $9 million write-off of net patient accounts receivable and the $21.5 million lawsuit settlement charge.

A flow-chart showing the relationship between parent company Kalispell Regional Healthcare and its subsidiaries shows KRH, a nonprofit corporation, had net revenue of $573.3 million for the most recent fiscal year. North Valley Hospital had net revenue of $71.7 million. The HealthCenter LLC, a physician joint venture, showed net revenue of $81.6 million. Kalispell Regional Medical Center had $400 million in net revenue.

The Authority board was presented with a list of strengths and concerns for Kalispell Regional’s bond-issue request.

One of the hospital’s key strengths is that it holds a dominant market share with limited competition. It’s also expanding its regional footprint and is developing service lines — such as the children’s pediatric center — that are unique to Montana.

Under “concerns” was a notation that operating income has declined and fiscal year 2018 showed an unbudgeted loss. A financial analysis lists operating income at $2.5 million in 2016, a deficit of $9,793 in 2017 and a deficit of $36.9 million in 2018.

Changes in the market due to changes on the state and federal funding levels also was noted, including the risk of sunset of the Montana Medicaid program in 2019, changes in the state bed tax by 2020 and federal changes in Medicare rates.

Features Editor Lynnette Hintze may be reached at 758-4421 or lhintze@dailyinterlake.com.