A job creation idea so obviously good even Washington couldn't possibly say no... could it?
Photo: Courtesy of Vista Community Clinic
Barack Obama has spent most of his first term as president wrestling with three enormous tasks: kick-starting the economy to create jobs again; standing the banking sector back on its feet; and providing health care to the 40 million Americans who lack insurance. He’s made progress on all these fronts.
But let’s be honest. Despite billions in federal stimulus money, the American jobs machine is barely functioning, and millions of previously hardworking Americans, especially in construction and the “trades,” are sitting idle. Despite billions in bailouts, America’s banks are barely lending, especially to small businesses. And while Obama did pass health care reform, those very reforms actually threaten to overwhelm an already severely strained primary health care infrastructure with a huge wall of new “customers” demanding health care services.
In 2014, a little more than two short years away, the provisions in the Affordable Care Act (ACA) that are designed to expand coverage will kick in, initiating a deluge of insurance-card-carrying Americans into the health care system. These disproportionately low-income, newly insured people will live in every state and community in the country. Unless we act now, they stand to join the ranks of the “medically disenfranchised”—the more than 50 million already insured Americans who have no regular access to primary health care for lack of physicians and facilities in their local communities. Think our transportation infrastructure is under stress? Our health care infrastructure is like an already clogged highway system that’s about to take on 32 million new vehicles overnight.
These three problems—the economy’s failure to create jobs, the banking sector’s unwillingness to lend, and the health care system’s lack of capacity to meet an accelerating rise in demand—might seem intractable, especially in a deadlocked Washington where no new money is likely to be put on the table. But if we could take off our ideological blinders for a moment—if conservatives could stop seeing every federal action as an assault on freedom, and liberals could get beyond their belief that spending more federal money is the way out of every problem—we would find a modest answer to all three of these problems staring us in the face.
Part of the solution is relatively uncontroversial. As Congress and the president have acknowledged, the way to meet the flood of new patients coming down the pike is to expand the nation’s existing network of community health centers— nonprofit clinics that offer primary care to the medically under-served, often in rural areas or inner cities. But to get this done, there’s no need to appropriate billions more in direct government spending. Rather, there is a way to lure skittish banks into lending private capital to finance a health center construction boom in all fifty states, simply by tweaking the language of an existing federal lending program. Doing so would save money in the long run by providing cost-effective primary care to those who desperately need it. And it would quickly create tens of thousands of jobs, many of them in the hard-hit construction sector. Moreover, unlike the roads, bridges, and other complex infrastructure projects the Obama administration wants to fund, few of which are shovel ready, health center projects could get the hammers swinging in months, not years.
Community health centers may sound like a liberal pet project—they originated under Lyndon Johnson’s Great Society, after all, and offer care regardless of patients’ ability to pay—but they have long enjoyed the steadfast support of Republicans and Democrats alike. President Obama invested $2 billion in health centers through his stimulus package, and the ACA—his signal legislative achievement—rightly carves out a huge role for them in handling the brunt of the newly insured patient load in 2014. But before the age of Obama, perhaps the greatest recent champion of health centers was, of all people, George W. Bush, who doubled their capacity under his watch. Richard Nixon, the first President Bush, and generations of GOP lawmakers also supported them.
Republicans like health centers in part because many of them serve the kind of rural districts that make up the conservative base, but also because they represent a fundamentally cost-effective institutional model. By providing comprehensive care under one roof, with primary care doctors at center stage, heath centers treat patients at a cost that is 41 percent lower than what other providers rack up, according to a recent study by the National Association of Community Health Centers. This translates into savings for the entire health care system of up to $17.6 billion annually. A low-income patient served at a community health center costs the federal government just $125 a year in direct subsidies. Moreover, that patient is far less likely to flock to the emergency room of a private hospital to receive basic care. (For this very reason, private hospitals also love community health centers.)
Today there are about 1,200 registered community health centers in America, serving 19 million patients with branches in 8,000 towns and cities. To meet the coming wave of patients newly insured under the ACA, the Department of Health and Human Services (HHS) estimates that community health centers will have to serve more than twice as many people as they do now—going from 19 million today to 40 million in 2015. To help them meet that goal, the ACA sets aside $11 billion to fuel nationwide health center expansion. There are two big problems with the ACA’s approach, however.
One is that big pots of money in Washington are always vulnerable to having their bottoms drilled out. In a fit of budget-cutting zeal in April, Congress slashed the annual funding that supports the operations of existing community health centers by $600 million. Hence HHS, which administers all the federal aid to health centers, has had to raid the “new expansion” piggy bank just to keep the old health centers running. This August, HHS was slated to announce grants to 350 health centers so they could open new branches. Instead, it named only sixty-seven.
The other problem with the funding set aside by the ACA is that the vast bulk of it can only go toward paying the operating expenses of a center, not its construction costs. That means a new center may use that federal money to pay rent on a new facility, but not to build or buy one. Thus the new centers will wind up operating as many do now, in make-do spaces like defunct big-box stores, rickety trailers, and even—in at least one case—a retrofitted gas station.
This is a very inefficient and, over the long run, expensive way for centers to expand. Needless to say, a converted gas station is hardly the ideal physical plant for a medical facility. But more importantly, rents only go up with time. If centers could build, own, or sign long-term leases for their own space, they would level out their occupancy costs, rather than watch those costs threaten to eclipse revenues year in and year out. Better yet, if health centers did so now, they would buy into a depressed real estate market with rock-bottom prices.
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.
At the same time, local real estate developers and construction companies across the country— which were doing a brisk business building strip malls, doctor’s offices, and the like before the recession—are dying to get back to work. Faced with a growth industry and access to capital, these commercial developers could be counted on not only to build what’s handed to them, but also to take the initiative to get as many projects as possible moving. Private developers could put up the equity themselves, design and build the facilities in joint venture partnerships with community health centers, and then rent out the facilities to the nonprofits on a long-term lease or through various lease-to-own arrangements. Indeed, hungry developers and construction firms would find any number of ways to get the hammers swinging—in small towns and blighted cities across the country—faster than Congress could ever ordain.
And of course, going the SBA route would alleviate many of the headaches and inefficiencies that currently make it so vexing for health centers to fund construction and expansion capital projects. Because SBA 504 loans are routine and efficient to process, the cost of structuring a new project’s financing would plummet. And the interest rates available to beneficiaries of an SBA 504 loan are among the lowest on the market. Right now, they are better than ever.
All those factors would dramatically lower the total cost of any given health center’s commercial real estate acquisition or construction project, which means centers would be able to finance a much higher proportion of the cost through loans. And that, in turn, means many fewer years running silent auctions and bake sales to scrape together a down payment. This is good, because time is of the essence. With real estate values depressed and interest rates at record lows, any health center that managed to receive an SBA 504 loan for a construction project today would wind up with a bargain. Better yet, the center would wind up with a debt burden that would only become more manageable with time, as the center’s revenues rise with inflation, but its payments remain fixed.
It’s hard to imagine Congress appropriating any more direct spending to fuel the construction of health centers. But there’s no good reason why they shouldn’t change a few words in a statute to achieve the same end. Not only would it quickly create much-needed jobs in the construction trades, it would also spark economic activity over the long run in some of the places in America that need it most. In a climate in Washington that is consumed with rhetoric about reducing government expenditures, creating jobs, and the need to get the private sector moving, this small change is one of the most surefire steps that Congress could take to show that government can both lead and get out of the way.
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