Subcommittee on Housing and Transportation


Hearing on S.2733 - The Affordable Housing for Seniors Act


Prepared Testimony of Mr. Edward L. Shapoff
Vice President
Goldman Sachs and Co.


2:00 p.m., Tuesday, July 18, 2000 - Dirksen 538


Good afternoon Mr. Chairman and distinguished Members of the Subcommittee; I thank you for the opportunity to testify today in support ofon S. 2733.

I am Edward Shapoff, a Vice President of Goldman, Sachs & Co., and the President of Goldman Sachs Housing and Health Care Funding Company, a Federal Housing Administration ("FHA") approved mortgage lender. I am appearing today on behalf of the Healthcare Financing Study Group ("Study Group"), an association of national and regional investment bankers and municipal bond insurers (Exhibit A) actively engaged in financing the construction and modernization of needed health care and assisted living facilities throughout the United States under the mortgage insurance provisions of the National Housing Act ("Act"). My remarks today will focus on Sections 501 through 503 of S. 2733 which would amend the FHA health care and assisted living programs of the Act to modernize and make them more consistent with today’s methods of delivering health care services of the highest quality and most affordable price. These amendments would help to assure that quality, affordable health care is more accessible to rural and urban American communities which have been unable to enjoy the benefits of the Act in its present form, and where uninsured conventional financing may not be readily available. I will refer to those three sections of S. 2733 collectively as the "Amendments."

The Study Group, whose members have worked with the FHA programs for decades, strongly supports the Amendments to make the health care and assisted living programs more useful in meeting the growing health and housing needs of elderly, sick and disabled Americans, as well as our most important resource – our children, in all areas of our country.

As you know, the basic health care sections of the Act (Section 232 for nursing home, intermediate care, board and care, and assisted living facilities, and Section 242 for hospitals and associated facilities) providing mortgage insurance for health care projects were enacted more than thirty years ago, and since their inception have assisted in or enabled the development of more than one hundred thousand nursing home and assisted living units, and three hundred hospital projects in over forty states and Puerto Rico (Exhibit B). Thanks to the credit enhancement provided through FHA mortgage insurance, many worthy projects, which might have been unable to obtain affordable construction or modernization financing through conventional private sources, have been successfully completed. In addition, these two sections of the Act have netted hundreds of millions of dollars to the Treasury and the FHA insurance funds from FHA fees and mortgage insurance premiums, and are scored "credit subsidy negative" (indicating that no net federal funds are required for their support) by the Office of Management and Budget ("OMB") (Exhibit C).

Furthermore, these FHA programs do not compete with private sector financing. Rather, they have tended to foster a sound working relationship between government and private industry. This fact is well illustrated by the active participation of private bond insurance companies (two of which are members of the Study Group) in bond financed FHA hospital and nursing home projects. Their involvement has materially reduced the cost of financing, thereby helping to assure the repayment of the insured loan and reducing FHA’s insurance risk. Debt service savings realized under these programs have also resulted in lower federal and state Medicare and Medicaid reimbursements. At the same time, FHA insurance is available to fill a void left by the conventional private sector which, traditionally, has preferred to lend at reasonable rates only to the very best investment grade credits. That is not to say, however, that all health care projects should or do have free entitlement to FHA credit enhancement. Indeed, few high-risk mortgage insurance applications would survive FHA’s rigorous underwriting processes.

The great majority of providers that have enjoyed the benefits of the FHA programs has established a successful history of operations thereafter, as indicated by the negative credit subsidy scoring by OMB. In addition, when a pattern of successful project operation emerges and is recognized in the financial community, borrowers have often been able to refinance at affordable rates in the private market, and thus leave behind the additional expenses and restrictions which FHA has reasonably established for the protection of its insurance funds.

Since their enactment over thirty years ago, Sections 232 and 242 have undergone only a limited number of modifications, with the result that the Act does not entirely reflect or accommodate the changing methodology and regulation of health care and assisted living delivery in the United States today. Two examples are found in the definitions of the types of facilities eligible for mortgage insurance, and in the Certificate of Need ("CON") requirements, and alternative procedures, for the hospital and nursing home programs.

With respect to the former, the narrow definitions of eligible facilities fail to reflect the "continuum of care" now commonly provided, within an individual facility or in a campus environment, for purposes of operational and cost efficiency, and continuity of care. This is a shortcoming that would be corrected by the Amendments of S. 2733.

As to the Certificate of Need problem, mortgage insurance under the hospital and nursing home programs of Sections 242 and 232 of the Act is conditioned upon the receipt of state issued CONs. In fact, many states over the last twenty years have eliminated their CON programs, or the agencies that would normally have issued the certificates. Examples are Arizona, California, Colorado, Kansas, New Jersey, New Mexico, Pennsylvania, Texas, Washington and Wyoming. Because of these and other legislative anachronisms in the FHA programs, otherwise needed projects become ineligible for low interest rate FHA financing. While the Act contains alternative requirements for states in which CONs are no longer available, the alternative requirements, though well intended, have proven unworkable or difficult to implement, particularly with respect to hospital financing, with the result that FHA loan insurance may be unavailable to assist in meeting healthcare needs in those states. This impediment has made it difficult for FHA to diversify its loan portfolio geographically, and has also made it difficult, if not impossible, for "critical access hospitals," particularly in more sparsely populated rural and western states, to obtain needed financing to modernize facilities which may date back to the mid 1900’s. The Amendments would solve this problem as well.

Without in any way intending to slight or diminish the stature of any portion of the Amendments (all of which we support), I would like now to examine in greater detail, and comment further upon, some of the more important areas of the Amendments which I feel are of particular significance to the Subcommittee and to the continued success of the FHA programs:

Sec. 502, New Integrated Service Facilities

Integrated Service Facility. The definition of Integrated Service Facility appears in this section of S. 2733. This is a technical amendment to existing law, and recognizes the changes to health care delivery methodology that have occurred over the years. Directed, as it is, toward the needs of our aging population, as well as to the sick, injured, disabled, or infirm, and for the prevention of illness, this new definition provides an FHA insurance authorization for new types of facilities for the same Americans intended to be covered originally by the National Housing Act, and recognizes the need to provide services on the most cost efficient and affordable basis. In addition, the definition includes facilities designed to provide a continuum of care, as determined by FHA, which affords FHA a greater ability to approve worthy, needed projects more suited to today’s delivery environment, if the other definitional requirements of Section 502 are met.

Licensure. Another important element of Section 502 is the amendment to the assisted living facility licensure requirement of the Act. Unless a facility is licensed by the state or other political subdivision where the facility is located, the facility will be ineligible for FHA mortgage insurance under current law. In those states or subdivisions where no licensing is required or obtainable, otherwise worthy assisted living projects are precluded from the benefits of FHA mortgage insurance. Section 502 solves this problem by permitting FHA to establish underwriting standards in lieu of licensure under those circumstances.

Certificate of Need. As I stated earlier, this requirement of both the nursing home and hospital programs has been an impediment to health care delivery in a number of states. Recognizing the evolving nature of regulation in many areas of the country, an earlier amendment to the Act, for states in which CONs were no longer obtainable, established an alternative to the issuance of a CON and permitted the state to commission and pay for an independent study to establish feasibility and market need for a proposed project. It also authorized the project sponsor to reimburse the state for the expense of the study. While this alternate procedure has been adopted in two states of which I am aware, California and Nevada, the process has been slow and cumbersome, may not yet be complete, and has required special state legislation to authorize the commissioning of such a study, and to appropriate money to pay for it. Administrative procedures had also to be established within state agencies to commission and review the studies. Finally, the study had to be in form and substance acceptable to FHA, and the financial consultant who prepared it had also to be acceptable to FHA.

While the basic CON requirement would not be altered, the Amendments would modify the alternate procedure to relieve the state of the burden and responsibility of commissioning and paying for the independent study for each project seeking FHA mortgage insurance. Instead, the requirement would be placed upon the project sponsor or applicant for insurance. FHA would approve the financial consultant preparing the study, and would’s role of review and approve the form and substance of the study itselfal would remain unchanged. The effect of this amendment will be to speed up and modernize the overall application process, relieve the state of unwanted burdens, and reduce costs as state processing or service fees would be eliminated. In addition, it will more effectively enable FHA to achieve geographic diversification in its insurance portfolio, a goal which has long been sought by FHA.

Sec. 503. Hospitals and Hospital-Based Integrated Service Facilities

Definitions. This section eliminates from the Section 242 definition of an eligible "Hospital" the archaic test that denies eligibility where more than 50% of patient days are customarily assignable in any year to such illnesses as drug and alcoholic, epileptic, mentally deficient, mental, nervous and mental and tuberculosis. Today, some of these afflictions are recognized as acute in nature, and may be reimbursed on that basis in an acute care hospital. Furthermore, since acute care services (operating and emergency rooms, for example)of any type are not permittedineligible under the FHA nursing home program, the 50% rule, particularly in a "continuum of care" environment, created a financing void for hospitals providing significant services of the type proscribed in the existing definitions of the Act.

Hospital-Based Integrated Service Facilities. The definition of Integrated Service Facility introduced in Section 502 of S. 2733 is incorporated into Section 503 by reference. Such a facility, when owned by a hospital sponsor, will become eligible for FHA insurance under Section 242 of the Act. As hospitals continue to add low cost, non-acute outpatient and ambulatory services, the Act’s acute care site oriented provisions artificially limit FHA’s ability to provide affordable capital to finance less costly, more efficient hospitalhospital-sponsored services-based healthcare delivery systems. For example, the Act does not currently permit the financing of a hospital’s non-acute care community health clinics for the care and prevention of illness, or laboratories and offices on sites separate and apart from the primary hospital site. This restriction, which imposes unnecessary financing costs on the hospitals, would be eliminated by the Amendments.

CON. The same beneficial amendments made to the Act’s alternate CON procedures by Section 502 of S. 2733, are carried over to this section, with equally salutary results for hospitals and FHA. This provision, coupled with the updating of the definition of an "eligible hospital," will represent the single most important modernization of hospital financing under Section 242 of the Act since it was introduced about 30 years ago.

Sec. 501. Rehabilitation of Existing Hospitals, Nursing Homes, and Other Facilities.

I have chosen to address this section last, not because it is any less important than the others, but because it contains elements, such as the integrated service facility, which were introduced in another section of S. 2733. Section 501 would amend Section 223(f) of the Act, which gives FHA the basic authority to insure loans for the purchase or refinancing of existing uninsured multifamily projects, or the refinancing of existing uninsured hospitals, nursing homes and other such facilities.

Refinancings. Section 501 adds existing integrated service facilities to the list of projects which may be refinanced, and authorizes the insured loan to include additional costs such as repairs, maintenance, minor improvements, or additional equipment as may be approved by FHA, all of which is consistent with conventional refinancings and considered standard in the lending community. In addition, this section would permit a "balloon" loan to be refinanced within two years of its maturity to enablepermit an institution to escape from the cycle of expensive roll-overs of short or intermediate termhigh interest balloon debt. The ability of existing facilities to refinance high rate uninsured mortgage loans will become even more important in those states which will benefit from the modification of the alternate CON protocols as set forth in Sections 502 and 503.

Project Purchases. Section 501 also clarifies existing law and extends to eligible applicants the ability to finance, at reasonable rates, the purchase of existing hospitals and existing integrated service facilities. Each of these modifications would again allow substantial debt service savings to health care providers in an increasingly cost conscious service market, as well as the enhancement of the FHA portfolio, and federal revenues, with strong, seasoned projects.

Conclusion.

In conclusion, Mr. Chairman and distinguished Members of the Subcommittee, I would like to say that the Study Group supports S. 2733, and views it as a singularly important and timely measure for the benefit of the health care delivery system, FHA, and the American people for the following reasons:

    1. It will help to assure the availability of affordable, low rate capital for projects for the sick, disabled and elderly in all areas of our country, rural as well as urban.
    2. It will assist in reducing debt service costs as well as related expenses of state/federal cost based reimbursement.
    3. Where reimbursement is based upon services rather than cost, lower debt service overhead will free additional project revenues for the improvement of services.
    4. S. 2733 will also help to maintain strong community job bases. Health care providers are often the largest neighborhood employers, enjoying strong philanthropic and community supportparticipation. They may also become magnets for non-health care neighborhood and community improvement and preservation, as well as economic development.
    5. The Amendments will assure the availability of low cost financing for new forms of integrated health care facilities (the continuum of care approach) which, to deal with changes in traditional revenue sources, are emerging as a means of providing the highest level of service at the lowest cost.
    6. Sections 232 and 242 of the Act will continue to produce substantial revenues to the Treasury through FHA mortgage insurance premiums and fees, a fact anticipated by OMB’s beneficial (negative) credit subsidy scoring in FY 2000 AND FY 2001.

Mr. Chairman, this concludes my testimony. I thank the Chairman and the distinguished Members of the Subcommittee for the opportunity to appear before you today.



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