Health Care and Education & Workforce Development and Transportation, Distribution & Logistics

How Clarian funds building projects:

September 26, 2005

Clarian Health Partners CEO Dan Evans offers a simple explanation for how the People Mover, Clarian's futuristic rail system, came to be a few years ago.

"People ask me all the time how we paid for it. I said, 'Thank the stock market,'" he said.

The bull market of the late 1990s allowed Clarian to use mostly investment income to fund the $40 million transportation project that opened in 2003 and connects its three downtown hospitals: Methodist, IU and Riley Hospital for Children.

Operating results, which includes earnings from Clarian's $962 million investment portfolio, is one of three basic funding sources the hospital network can tap to pay for large capital projects.

The others are fund raising and the issuing of bonds, which is done through the Indiana Health and Educational Facility Financing Authority.

The combination Clarian uses depends on the project. It used taxable bonds to cover about 95 percent of the $455 million cost of its two new hospitals, Clarian North and Clarian West, said Isadore Rivas, Clarian's vice president of finance. Ownership of those for-profit hospitals is split between Clarian and doctors practicing there.

Fund raising will play a much larger role in Clarian's plan to build a $150 million IU Cancer Center and a $200 million addition to Riley. The Indiana University Foundation will raise at least $50 million for the cancer center, and Riley's foundation will raise another $50 million for its project, Evans said.

"There's a lot of enthusiasm to raise money for children and a lot of enthusiasm to raise money for cancer," he noted.

Nationally, hospitals pay for the bulk of their capital projects with bond sales. There's a receptive market for them, especially among large investors like the California Public Employees' Retirement System, according to Ed Parkhurst, principal of Illinois-based Prism Healthcare Consulting.

Investors typically are repaid with interest over up to 30 years. Hospitals default on less than 1 percent of the bonds they sell, making them attractive long-term investments for conservative investors, according to Jim Morell of Morell & Associates, a Northbrook, Ill.-based health care consulting firm.

These payments are typically manageable for a large organization like Clarian, which reported $1.3 billion in operating revenue in 2003, according to the latest annual financial report available from the state Department of Health.

Parkhurst said a hospital will pay about $9 million in annual debt service for every $100 million in debt it accumulates.

"That $9 million is a drop in the bucket on an annual basis for a large organization," he noted.
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