Hospitals duel in Montgomery
Adventist, Holy Cross face off over rights to build county's next medical center
The story was corrected on May 10, 2010. An explanation follows the story.
Business groups are divided in the contentious battle between two nonprofits vying to build a hospital in the rapidly growing northern part of Montgomery County.
One group of 19 business and community leaders signed a joint letter to state officials supporting Adventist HealthCare's proposal to build the Clarksburg Community Hospital and Medical Campus in Clarksburg.
"We believe this is the superior proposal for a new hospital in Montgomery County," the group wrote.
But the former president of the Gaithersburg-Germantown Chamber of Commerce, James A. Hyatt, says his organization should be supporting Holy Cross Hospital's plan for a new hospital in Germantown, but isn't because the chamber's chairman is Robert Jepson, Adventist's associate vice president for government relations.
"Residents of Clarksburg have the advantage right now Adventist has rallied their chamber of commerce and other civic groups to voice their support for the Clarksburg hospital," said Hyatt, who supports the Holy Cross proposal, about five miles away from the planned Adventist hospital, in an e-mail to The Gazette. "For those of us in Germantown, we cannot expect to get support from our own chamber of commerce."
The dueling business support reflects how the two organizations are trying to rally community backing as they seek state approval for their multimillion-dollar proposals only one of which will win that approval.
Both church-affiliated applicants took their campaigns public in August in an effort to win backing, from setting up Facebook pages to passing out fliers at local events.
A reviewer for the Maryland Health Care Commission, which will award the certificate needed to open the county's first new, full-service hospital in 30 years, is scheduled to meet with the applicants Holy Cross Hospital of Silver Spring and Adventist HealthCare of Rockville on May 20 to set a hearing date on the proposals.
A decision, which earlier had been expected this summer, may not be made until the fall, said Pamela Barclay, director of the commission's Center for Hospital Services.
"A comparative review is a significant undertaking," Barclay said.
The last time a new hospital was constructed in an area without an existing hospital was in 1993, when Atlantic General Hospital in Berlin opened its doors, Barclay said.
More than $3 billion in hospital expansion, remodeling and construction projects recently has been completed or soon will be across Maryland from Cumberland to the Eastern Shore and is largely the result of hospitals trying to keep up with an aging population that will need more health care services.
Nearly all of those projects were to renovate or replace existing facilities, many of which were built in the 1950s and '60s, Barclay said.
Questions about finances, transparency
Holy Cross officials have questioned whether Adventist HealthCare's financial rating is strong enough.
For its part, Adventist, which owns land for a hospital in Clarksburg and runs a stand-alone emergency room in Germantown in addition to its Shady Grove Adventist Hospital in Rockville, maintains that Holy Cross officials haven't been transparent about their plans.
The decision on which one receives the necessary certificate of need will be made by the 15-member state health commission, which examines a range of factors, from construction financing to community support.
Holy Cross officials contend in papers filed with the commission that Adventist HealthCare does not have the funds to build a new facility.
"We do obviously raise the question of how they'll be able to do this," said Kevin Sexton, president and CEO of Holy Cross Hospital. "Sure, that is a legitimate reason to raise in a comparative review. It's an extraordinary hill to climb."
Jepson counters that Adventist will be able to fund its project.
Unlike Holy Cross, Adventist has had plans for the northern part of Montgomery County for a long time, Jepson said.
"We've been working on the Clarksburg campus [for] about a decade," he said.
When Adventist bought 200 acres off Interstate 270, executives said at the time and over the years that the parcel was being considered for a range of possible uses from a hospital to medical offices and treatment centers.
The Holy Cross plan, announced in August 2008, calls for a 93-bed hospital on the Montgomery College campus in Germantown, where a bioscience-technology park had long been planned.
In April 2009, Adventist HealthCare unveiled a plan to build a 100-bed hospital as part of a health care campus in Clarksburg. Since then, Adventist has scaled back its proposal to an 86-bed facility, largely because of changing demographic projections.
Since buying the land nine years ago, Adventist has spent $17 million in acquisition costs, infrastructure planning, environmental impact studies and other measures to gain site approval from the county, Jepson said. Doing that work first was necessary for a project the size of the proposed hospital, he said.
"We think it's irresponsible to apply for a certificate of need and the site may not be suitable from a traffic standpoint or from a growth and development standpoint," Jepson said.
Aspects of the Adventist proposal for Clarksburg from the preliminary plans to the infrastructure site plans to the water and sewer use plans have received approvals from the Montgomery County Department of Permitting Services, the Maryland-National Capital Park and Planning Commission and other agencies.
Holy Cross officials have not received county approvals for their proposal.
"The answer is, yes, we have a signed lease with the college," Sexton said. "Everybody is committed to the lease. It is at least 90 years."
A companion to the lease commits Holy Cross to a variety of financial and in-kind support for the college's educational programs, Sexton said. The college will double the number of nursing graduates in five years, and the hospital has a steering group appointed by the college and the hospital to manage that implementation, Sexton said.
While Holy Cross officials have contended that they are in better financial shape to build and operate a hospital, Barclay said that during commission reviews, a stronger financial picture is not given more weight than community support.
But Sexton argues Holy Cross has "been a stronger performer, operationally."
Credit ratings vs. cost-effectiveness?
Bond rating agency Moody's Investors Services gave Holy Cross' parent organization, Trinity Health, a AA2 credit rating with a "stable outlook," while Adventist HealthCare received a Baa2 with a "negative outlook."
Adventist's "rating outlook remains negative, reflecting thin balance sheet measures, very modest cash-to-demand debt, a lack of cushion to the days cash covenant in various bank agreements ... and system strategic growth plans that will likely include the addition of significant leverage in the mid-term," Moody's reported in December.
While Holy Cross has referred to its funding as "self-financing," its construction money would be borrowed from its parent organization, which funds capital projects at its facilities through a $400 million fund raised by issuing bonds.
"We're blessed to have a very, very strong capital rating of AA," Sexton said. "That's rare and very useful when capital is very tight."
Moody's most recent report from October 2009 for Trinity lists the organization as "stable."
Holy Cross Hospital's parent organization already has committed funding to the project, Sexton said.
"We're ready to go," he said.
"The stable outlook reflects our belief that management will continue to generate double digit operating cash flows to support existing debt service, while maintaining its liquidity and balance sheet profile," the Moody's report stated.
The better bond rating held by its parent organization will allow for a much lower interest rate for the Holy Cross project, officials there said.
An interest rate difference of 1 percent in construction loans could mean about $2 million per year in principal and interest payments for much of the 30-year-bond agreement, said Gary Vogan, CFO with Holy Cross.
"You could run at least one clinic to treat 20,000 uninsured off those savings," Vogan said. "You could buy a surgical robot to help with prostate operations or pay 30 more nurses for a year with salary and benefits."
But Adventist officials say they would have no trouble financing their project through the bond market.
"Any discussion on financing is purely speculative, because we really don't know which or either plan is going to be approved," Jepson said.
"Our proposal is much more cost-effective than theirs," he added, citing his project's lower overall costs. "For them to say we'd never get the funding to build an 86-bed hospital is absurd."
Holy Cross officials say the roughly $24 million difference in capital costs between the two projects is not a sign that the Adventist plan is more cost-effective.
"Over the 50-year life of a hospital, that difference is not that significant," said Annice Cody, vice president of strategic planning at Holy Cross, "especially when you take into account the very real difference in financing costs."
Both nonprofits should be able to find financing for their projects without difficulty, said Troy A. Gerleman, COO with Merritt Research Services in Hiawatha, Iowa, which conducts research for mutual fund companies in the hospital bond market. His company does not have a stake in the Holy Cross-Adventist dispute.
The financial strength of a hospital sometimes has more to do with the percentage of the population with full insurance coverage than it does with the hospital's management, Gerleman said.
But, Gerleman said, "The higher your rating is, the cheaper your access to capital. When you're talking about big numbers, even a small change in rating can have a very amplified effect on the overall cost of capital in the 30-year life of a bond."
Gerleman said Holy Cross might have an advantage in the cost of its capital, but he asked, "Does that translate into a cheaper appendectomy there because they pay lower interest? It's doubtful."
This story was clarified to show that the comments by James A. Hyatt were from an e-mail sent to The Gazette.