Features

November/December 2011 Shovel-Ready Clinics

A job creation idea so obviously good even Washington couldn't possibly say no... could it?

By Jeffrey Leonard

But direct spending from the federal government won’t get them there. Recently, a firm called Capital Link, which helps health centers put together the financing necessary for expansion, estimated that, to sustainably meet the goal of 40 million patients, 5,775 facilities would need to be built or refurbished, at an average cost per health center of $14 million. That amounts to about $16.6 billion in capital spending. Combined, the ACA and the stimulus only provide about $3 billion in grants for capital improvements, and friends in Congress have told health centers not to come looking for more. That leaves a gap of more than $13 billion for health centers to come up with on their own.

When left to their own devices, community health centers can succeed in building new facilities without grant money from the federal government. But a variety of factors conspire to make it devilishly hard for them to raise capital. I saw firsthand how arduous and time consuming this can be when I recently spent six years on the board of the National Cooperative Bank, which makes loans to health centers and other similar nonprofits. Generally speaking, health centers have steady revenue streams but tight operating margins, which means they don’t have large balance sheets for down payments, and they can’t afford to take on very large debt burdens. Therefore, when contemplating a new building project or the acquisition of an existing commercial property, they often have to start by raising as much as half of the cost through donations. But securing those donations isn’t easy. Universities have wealthy, grateful alumni, and big hospitals have wealthy, grateful ex-patients, but community health centers have no natural fund-raising constituency, since almost all of their patients are poor. It can take years and years of bake sales, silent auctions, and phone drives just to raise enough money for a down payment on a new building. In my conversations with the leaders of health centers serving Latino communities in the San Diego area, low-income groups in the inner city of Detroit, and farm communities in the rural heartland, I’ve heard tales of fundraising drives that lasted eight years or more, just to come up with the 50 percent of equity capital necessary to buy or build a new facility.

Nor is it easy for health centers to secure loans from banks once they have raised their equity capital. When examining any particular community health center—a clinic, say, in an economically distressed inner-city neighborhood serving a mixture of Medicaid patients and the uninsured, or one in a depressed heartland town where real estate prices are spiraling downward—a lending institution may balk. (Health centers also report that banks are made skittish by Washington’s erratic attitude toward Medicaid.) When a health center finally does manage to arrive at a financing package, the deal often pulls together an alphabet soup of government or not-for-profit agencies that have provided small slices of funding—resulting in complex arrangements that always incur substantial legal fees. At times the mere cost of structuring such a deal can run to more than 10 percent of the total project cost. Normally, in property development, you’d expect such non-construction costs to account for just 2 or 3 percent. The upshot: community health center projects get financed and constructed through a remarkably inefficient, costly, and time-consuming process that—when looked at from a business perspective—simply makes no sense.

And yet there is no reason why community health centers could not be financed more efficiently in the private sector. Out of the 1,200 community health centers in America today, only one or two have ever defaulted on a loan. As modest as their revenue streams are, they are nothing if not reliable. And health centers’ cash flows are only going to improve with time. Today, some 38 percent of health center patients are uninsured. By 2015, that number should be down to about 20 percent. (After Massachusetts passed its health care reform legislation five years ago, the proportion of uninsured health center patients dropped from 36 percent to 20 percent, and the patient base at health centers across the state increased by about 30 percent, as more people flocked to receive the primary care they couldn’t afford before.) If health centers were businesses, they would have a stellar outlook.

Nevertheless, given the current tools at their disposal, health centers are hobbled in their attempts to build capital. Looking to the federal government to come to the rescue with more direct spending—as the debacle with the ACA funding shows—is not the answer. Unless someone can figure out how to appropriate $13 billion more from the federal treasury (good luck with that), we need to find another way.

A good start would be to look beyond the nonprofit world, to see how certain small private-sector businesses put together capital for expansion. One of the most successful devices the government has to stimulate commercial development in low-and moderate-income communities is the Small Business Administration’s 504 loan program. Here’s how it works: When a small business wants to expand by buying, building, or renovating a facility, it approaches a local Certified Development Company (CDC)—a nonprofit lender that is approved by the Small Business Association to issue low-interest, fixed-rate, government-backed bonds to finance up to 40 percent of a project. Provided the small business meets certain criteria—that it can promise to create or retain one local job for each $100,000 loaned, for instance, and that it will occupy the facility being built—the CDC approves the deal and then partners with a bank, which puts up another 50 or so percent of the project financing. That leaves the borrower—the small business—needing to put down as little as 10 percent as a down payment. The program has one of the government’s most exceptional track records of providing return on public investment. And it is a self-funding loan guarantee program, so its cost to the government is virtually nil.

The problem is that the SBA 504 loan program is only open to certain for-profit businesses. In order to make it available to community health centers, Congress would have to change the statute governing the program. Here’s how: explicitly list community health centers as eligible to receive 504 loans, and further designate that a private developer or holding company may also qualify to receive a 504 loan if it signs a long-term commercial lease, equal to the term of the loan, with a community health center. If Congress decided to promulgate these minor changes, with one stroke it could set off a minor building boom in America.

Banks, which have been sitting on the sidelines of the commercial real estate market since 2008 for lack of demand and good deal flow, would almost certainly jump at the chance to fund the construction of new community health centers. They are already well accustomed to working with CDCs and the Small Business Administration. And financing health centers under this arrangement would allow banks to amass “community reinvestment credits,” thus meeting a federal requirement that they contribute a certain amount each year to the development of low- and middle-income communities.

Jeffrey Leonard is the CEO of the Global Environment Fund, a growth capital-oriented investment firm, and the chairman of the Washington Monthly board of directors. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.

Comments

  • sue rn on October 26, 2011 11:27 AM:

    AMEN!

  • momo on October 26, 2011 2:21 PM:

    a good and through article. refreshingly fair, too.

  • beb on October 26, 2011 5:57 PM:

    The Republicans have already spoken. They will oppose any and everything that Obama proposes. Community Health Clinics... won't happen. That's Kenyan socialism!

  • Equal Opportunity Cynic on October 26, 2011 8:37 PM:

    I got to paragraph 4, then false equivalency fatigue set in.

  • Diane Smith on October 27, 2011 8:13 AM:

    I also believe that Mr. Obama had a lot of serious problems to deal with, but he is a decent and reasonable man and I am sure that he is doing his best!

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  • Howey on October 29, 2011 11:36 AM:

    I proposed this same idea almost two years ago on my forum. It's such a simple solution I'm not surprised nobody figured it out.

    http://popculturedoneright.smfforfree.com/index.php/topic,32.0.html

  • cjenk415 on October 30, 2011 3:39 PM:

    I'd say part of the problem is liberals insisting on engaging conservatives as though they were acting in good faith, like what you're doing in this article. In fact, I would say that is the ONLY problem and everything else is just obfuscation.

    Why is the conservative ideology inconsistent?

    BECAUSE. THEY. ARE LYING.

    Their ideology serves and agenda to gain and hold power but it's just a tool they would discard if another tool served better. Quit being suckers, liberals.

  • dcotler on October 30, 2011 4:27 PM:

    So right EOCynic. Does the author really think that liberals harbor the preposterous belief "that spending more federal money is the way out of every problem?" A positive article about a good liberal policy proposal could do without the pro forma smack at a stupid straw man.

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  • Ben Leet on November 07, 2011 5:44 PM:

    A government guaranteed loan program was proposed by Robert Pollin to generate 18 million new jobs devoted to retrofitting buildings. See the March 8, 2010 issue of Nation Magazine. http://www.thenation.com/article/18-million-jobs-2012?page=0,3 Banks are sitting on about $1 trillion and corporations on $2 trillion, and virtually no jobs are being created. The default rate on government insured loans is historically low. The added cost to the government is relatively low. If 5,700 community health care centers were constructed, California communities would receive about 700 new medical provider centers. And that rate would be national. A problem with these solutions is that they minimize or ignore the problem: inequality. An economy where the majority of workers cannot purchase the products they produce can only shrink. The median household income has shrunk by 10% since 2007. Income inequality creates this condition, and it is unaddressed here in this article or nationally in general. A prime example is that $26,362 is the median income nationally according to the Social Security Administration, and $109,000 is the average economic output per worker according to the Federal Reserve Bank of San Francisco. (I source this information at http://benL8.blogspot.com) This is our learning moment, and this article contributes nicely to my education, but it does not go far enough. Don't forget to look at the Pollin article if you are really interested. Also inequality.org is a good source, toomuchonline.org, and stateofworkingamerica.org.

  • Stella Godbey on November 09, 2011 12:36 AM:

    Present your plan to a congressman, preferably a republican, so they won't automatically reject it as a socialist plot.

  • CaptainVideo on January 01, 2012 12:40 PM:

    "Washington couldn't possibly say no... could it?"

    Of course the Republican House will say no. They want to keep the unemployment rate as high as possible before the election and will oppose anything that can create jobs.

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