Hospital Mortgage Insurance Program
Program and Risk Management Could Be Enhanced Gao ID: GAO-06-316 February 28, 2006Under its Hospital Mortgage Insurance Program, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) insures nearly $5 billion in mortgage loans for the renovation or construction of hospitals that would otherwise have difficulty accessing capital. In response to a requirement in the 2005 Consolidated Appropriations Conference Report, GAO examined (1) the design and management of the program, as compared with private insurance, (2) the nature and management of the relationship between HUD and the Department of Health and Human Services (HHS) in implementing the program, (3) the financial implications of the program to the General Insurance/Special Risk Insurance (GI/SRI) fund, including risk posed by program and market trends, and (4) how HUD estimates the annual credit subsidy for the program, including the factors and assumptions used.
The Hospital Mortgage Insurance Program insures the mortgages of hospitals that are generally riskier than those that can obtain private bond insurance. While FHA's process for reviewing mortgage insurance applications includes more steps and generally takes longer, the agency monitors active loans with many of the same techniques that private bond insurers use. Under a Memorandum of Agreement, FHA and HHS work together in a variety of ways to review mortgage insurance applications and monitor active loans. However, FHA does not collect data to assess program performance against most performance measures specified in the memorandum, some of which are not objective. Further, FHA has not kept its program handbook of policies and procedures for applicants, lenders, and others up-to-date. The hospital program is small compared with other programs in the GI/SRI fund, and the losses from claims have been relatively low. Despite the program's relatively small size, some program and market trends may pose risks. For example, 61 percent of the program's total insured, outstanding loan amount is concentrated in New York, which makes the program vulnerable to state policies and regional economic conditions. While FHA has goals to diversify the hospital insurance portfolio and has made efforts to do so, it does not have a formal strategy to achieve these goals. To estimate the credit subsidy cost, or program costs, over the life of the outstanding loans insured, HUD uses a model that incorporates factors and assumptions about how loans will perform, including estimated claim and recovery rates, which are consistent with federal guidance. However, HUD's model does not explicitly consider some factors, such as the potential impacts of prepayment penalties or restrictions, which according to some economic studies, are important in modeling default risk.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-316, Hospital Mortgage Insurance Program: Program and Risk Management Could Be Enhanced
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Report to Congressional Committees:
February 2006:
Hospital Mortgage Insurance Program:
Program and Risk Management Could Be Enhanced:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-316]:
GAO Highlights:
Highlights of GAO-06-316, a report to congressional committees:
Why GAO Did This Study:
Under its Hospital Mortgage Insurance Program, the Department of
Housing and Urban Development‘s (HUD) Federal Housing Administration
(FHA) insures nearly $5 billion in mortgage loans for the renovation or
construction of hospitals that would otherwise have difficulty
accessing capital. In response to a requirement in the 2005
Consolidated Appropriations Conference Report, GAO examined (1) the
design and management of the program, as compared with private
insurance, (2) the nature and management of the relationship between
HUD and the Department of Health and Human Services (HHS) in
implementing the program, (3) the financial implications of the program
to the General Insurance/Special Risk Insurance (GI/SRI) fund,
including risk posed by program and market trends, and (4) how HUD
estimates the annual credit subsidy for the program, including the
factors and assumptions used.
What GAO Found:
The Hospital Mortgage Insurance Program insures the mortgages of
hospitals that are generally riskier than those that can obtain private
bond insurance. While FHA‘s process for reviewing mortgage insurance
applications includes more steps and generally takes longer, the agency
monitors active loans with many of the same techniques that private
bond insurers use.
Under a Memorandum of Agreement, FHA and HHS work together in a variety
of ways to review mortgage insurance applications and monitor active
loans. However, FHA does not collect data to assess program performance
against most performance measures specified in the memorandum, some of
which are not objective. Further, FHA has not kept its program handbook
of policies and procedures for applicants, lenders, and others up-to-
date.
The hospital program is small compared with other programs in the
GI/SRI fund, and the losses from claims have been relatively low.
Despite the program‘s relatively small size, some program and market
trends may pose risks. For example, 61 percent of the program‘s total
insured, outstanding loan amount is concentrated in New York, which
makes the program vulnerable to state policies and regional economic
conditions. While FHA has goals to diversify the hospital insurance
portfolio and has made efforts to do so, it does not have a formal
strategy to achieve these goals.
To estimate the credit subsidy cost, or program costs, over the life of
the outstanding loans insured, HUD uses a model that incorporates
factors and assumptions about how loans will perform, including
estimated claim and recovery rates, which are consistent with federal
guidance. However, HUD‘s model does not explicitly consider some
factors, such as the potential impacts of prepayment penalties or
restrictions, which according to some economic studies, are important
in modeling default risk.
FHA Hospitals Remain Concentrated in the Northeast as of December 2005:
Active Loan Dollar Amount and Number of Loans by State:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that the HUD Secretary ensure that program performance
measures are useful, update the program handbook, develop a formal
geographic diversification strategy, and explore adding factors to
HUD‘s credit subsidy model. HUD agreed with GAO‘s recommendations but
said that the report did not adequately emphasize the program‘s
accomplishments.
www.gao.gov/cgi-bin/getrpt?GAO-06-316.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at (202)
512-6878 or WoodD@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
FHA's Selection Process Includes Additional Steps Compared with Private
Insurers, but Monitoring Techniques Are Similar:
Agencies Coordinate Key Activities, but FHA Does Not Track Most
Performance Measures:
Potential Risks Exist Although FHA Has Mitigation Strategies in Place:
HUD's Model for Estimating Credit Subsidy Costs Excludes Potentially
Relevant Factors:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: FHA and HHS' Responsibilities in FHA's Hospital Mortgage
Insurance Program Loan Cycle:
Appendix III: FHA Assessed Performance Using 2 of 22 Performance
Measures Included in the 2002-2005 Memorandum of Agreement:
Appendix IV: Comments from the Department of Housing and Urban
Development:
Appendix V: Comments from the Department of Health and Human Services:
Appendix VI: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Number of New Loans Insured through the Hospital Mortgage
Insurance Program Since 2001:
Figures:
Figure 1: FHA Did Not Process Most Hospital Mortgage Insurance
Applications within Targeted Time Frame:
Figure 2: Hospital Mortgage Insurance Program Comprises a Relatively
Small Part of the GI/SRI Fund:
Figure 3: Proportion of FHA Hospital Loans That Have Been Insured Less
Than 10 Years:
Figure 4: Selected Median Financial Indicators Show Varying Levels of
Risk:
Figure 5: Selected Median Financial Indicators Show High Levels of Risk
for Priority Watch List Hospitals:
Figure 6: FHA Loans Remain Concentrated in the Northeast as of December
2005: Active Loan Dollar Amount and Number of Loans by State:
Figure 7: Applications for Hospital Mortgage Insurance are
Geographically Dispersed as of December 2005: Application Dollar Amount
and Number of Applications by State:
Figure 8: FHA-Insured Hospitals Have Medicare and Medicaid Payers among
Their Patient Discharges:
Figure 9: Credit Subsidy Rates for the Hospital Mortgage Insurance
Program Have Generally Not Indicated a Need for Subsidies:
Abbreviations:
AE: Account Executive:
CAH: Critical Access Hospitals:
CMS: Centers for Medicare & Medicaid Services:
FHA: Federal Housing Administration:
GI/SRI: General Insurance/Special Risk Insurance:
HHS: Department of Health and Human Services:
HMIMIS: Hospital Mortgage Insurance Management Information System:
HUD: Department of Housing and Urban Development:
MOA: Memorandum of Agreement:
OMB: Office of Management and Budget:
PART: Program Assessment Rating Tool:
PMG: Program Management Group:
PWL: Priority Watch List:
Letter February 28, 2006:
The Honorable Christopher Bond:
Chairman:
The Honorable Patty Murray:
Ranking Member:
Subcommittee on Transportation, Treasury, the Judiciary, Housing and
Urban Development, and Related Agencies:
Committee on Appropriations:
United States Senate:
The Honorable Joe Knollenberg:
Chairman:
The Honorable John W. Olver:
Ranking Member:
Subcommittee on Transportation, Treasury, and Housing and Urban
Development, The Judiciary, District of Columbia, and Independent
Agencies:
Committee on Appropriations:
House of Representatives:
The Department of Housing and Urban Development (HUD), through the
Federal Housing Administration's (FHA) Hospital Mortgage Insurance
Program, insures loans to finance the renovation or construction of
hospitals. Through an interagency agreement, the Department of Health
and Human Services (HHS) administers certain aspects of this program
based upon its health care and hospital expertise. The program is
intended to protect lenders against losses they might incur if
hospitals fail to make their mortgage payments. As of December 31,
2005, FHA reported that it insured nearly $5 billion in outstanding
mortgages under the program.
The Hospital Mortgage Insurance Program is one of several programs
included in FHA's General Insurance/Special Risk Insurance (GI/SRI)
fund; other programs in the GI/SRI fund are much larger and include
mortgage insurance for various types of multifamily housing projects
and for nursing homes. Pursuant to the Federal Credit Reform Act of
1990, for budget purposes HUD must annually estimate the credit subsidy
for the program.[Footnote 1] The credit subsidy cost for loan
guarantees is the present value of cash flows over the life of the loan
from estimated payments by the government (for defaults, delinquencies,
and other payments) minus estimated payments to the government (for
loan origination and other fees, penalties, and recoveries); it
excludes administrative costs. Such estimates are important indicators
of the full cost of programs to the government.
The 2005 Consolidated Appropriations Conference Report mandated that we
review two FHA insurance programs--those for hospitals and nursing
homes. This report provides the results of our evaluation of the
Hospital Mortgage Insurance Program.[Footnote 2] For this report, we
reviewed (1) the design and management of the program, as compared with
private insurance; (2) the nature and management of the relationship
between HUD and HHS in implementing the program; (3) the financial
implications of the program to the GI/SRI fund, including risk posed by
program and market trends; and (4) how HUD estimates the annual credit
subsidy for the program, including the factors and assumptions used.
To address these objectives, we reviewed program manuals and
documentation of loan processing procedures and analyzed program
financial data, which we determined to be reliable for the purposes of
our review. We also reviewed documentation of HUD's credit subsidy
model and applicable program laws, regulations, and policy statements.
We interviewed officials from FHA's Office of Insured Health Care
Facilities and the Division of Facilities and Loans within HHS' Health
Resources and Services Administration. We also interviewed health care
and hospital associations, mortgage and investment banking firms,
rating agencies, and private bond insurers. Our review of the hospital
program did not include an evaluation of underwriting criteria,
construction monitoring, or the need for the program. See appendix I
for more detailed information on our objectives, scope, and
methodology.
We conducted our work in New York, New York; Chicago, Illinois;
Paterson, New Jersey; Rockville, Maryland; and Washington, D.C.,
between February 2005 and January 2006 in accordance with generally
accepted government auditing standards.
Results in Brief:
The Hospital Mortgage Insurance Program insures the mortgages of
hospitals that are financially riskier than those that can obtain
private insurance, but it shares some management techniques with
private insurers. While FHA's process for reviewing mortgage insurance
applications includes more steps, such as a preapplication meeting and
review by an independent consultant, and generally takes longer, FHA
officials believe these extra steps are justified given the generally
riskier nature of the hospitals applying. Once it insures a hospital
mortgage, FHA monitors the loan using many of the same techniques that
private insurers use. For example, both FHA and private insurers
identify the riskiest loans in their portfolios for closer monitoring.
They also periodically review hospital financial statements and
management activities and can require hospitals experiencing financial
difficulties to use consultants for needed expertise.
FHA and HHS work together throughout the process of reviewing mortgage
insurance applications and monitoring active loans, guided by a
multiyear Memorandum of Agreement between the two agencies. However,
FHA has not used the agreement's performance measures to manage the
program, and its program guidance is not up to date. FHA and HHS use
joint working groups to carry out certain activities. For example,
client service teams, which can be composed of HHS staff, FHA staff, or
both, review application materials. Also, senior FHA and HHS officials
meet weekly to discuss insurance applications, as well as insured
hospitals that are experiencing difficulties. While the agencies
coordinate in program implementation, FHA does not collect data to
track most of the performance measures, including those for coordinated
or HHS-delegated tasks. For example, one performance measure is
designed to capture the soundness of the analysis of a hospital's
application, but FHA does not collect data to assess this performance
measure. Other performance measures are not measurable or objective.
According to FHA, the measures are intended to communicate
expectations, and it has not tracked most performance measures because
there have not been enough problems to warrant a tracking system.
Finally, FHA has not updated the program handbook, which contains
program eligibility requirements, policies, and procedures, since 1984.
The Hospital Mortgage Insurance Program is small compared with other
programs in the GI/SRI fund--accounting for about 7 percent of the
amount of all active loans insured by the fund--and the losses from
claims have been relatively low. The program has not experienced a
claim since 1999. Despite the program's relatively small size, some
program and market trends may pose risks. For example, the geographic
concentration of insured hospitals located in the state of New York,
while decreasing, makes the program vulnerable to state policies and
regional economic conditions. In addition, literature on hospital
industry market trends generally predicts reductions in hospital
revenues along with increasing capital needs--conditions that could
increase the risk of FHA insured loans going to claim. FHA has
established mitigation strategies to address some potential risks. For
example, FHA requires hospitals to establish cash reserve funds equal
to 2 years worth of mortgage payments. These funds may be used to help
hospitals through temporary financial crises and prevent their lenders
from filing an insurance claim. Also, FHA's identification of its
riskiest hospitals enables the agency to prioritize those hospitals
that need additional monitoring and assistance. In addition, since
1999, FHA has had goals for geographically diversifying the hospital
mortgage insurance portfolio. Though it has made efforts to diversify
the portfolio, FHA does not have a formal strategy for reaching its
diversification goals.
HUD uses a model for estimating annual credit subsidies, or program
costs over the life of the outstanding loans insured, that does not
explicitly consider the impacts of some potentially important factors.
HUD's model--an important tool for estimating the cost of the hospital
program to the government--incorporates factors and assumptions about
how the loans will perform, including estimated claim and recovery
rates, which are consistent with guidance issued by the Office of
Management and Budget (OMB). Although the number of claims paid since
the program's inception is small, HUD assumes that the lenders for some
active hospitals will file claims for insurance and, therefore,
increases its estimated claim rate. In 10 of the 14 years that HUD has
been estimating the cost of the hospital program under credit reform,
HUD has calculated a negative subsidy rate, meaning that estimated cash
inflows (including fees, premiums, and recoveries on defaulted loans)
have been greater than estimated cash outflows (including claims and
certain program expenses). HUD's model does not explicitly consider the
potential impacts of prepayment penalties or restrictions, which can
influence cash flows through the timing of prepayments, collection of
premiums, and claims. HUD's model also does not consider the initial
debt-service coverage ratios of hospitals (an indicator of a borrower's
ability to make regular mortgage payments) at the point of loan
origination when estimating future claims, although, according to some
economic studies, this ratio is an important factor in modeling default
risk. HUD does not include these factors in its model because,
according to HUD, it does not collect data on prepayment restrictions
and because debt-service coverage ratios, among other things, do not
vary. We found that data on prepayment restrictions are readily
available to FHA. Further, our analysis of projected debt-service
coverage ratios for hospitals that applied for mortgage insurance
between 2002 and 2005 found that these ratios varied (with the highest
being over twice that of the lowest) and thus can be useful in
assessing relative risk.
This report contains recommendations designed to improve FHA's
management of the Hospital Mortgage Insurance Program and reduce risks
associated with the geographic concentration of the portfolio. We
provided draft copies of this report to HUD and HHS. In its response,
HUD's Assistant Secretary for Housing concurred with our
recommendations and noted actions that it plans to take. HUD also
stated that the report did not adequately emphasize the program's
accomplishments. HHS concurred with HUD's observations.
Background:
In 1968, the Congress added Section 242 to the National Housing Act
establishing the Hospital Mortgage Insurance Program to address a
serious shortage of hospitals and the need for existing hospitals to
expand and renovate. Through this program, FHA insures the loans
lenders make for the construction and renovation of hospitals.[Footnote
3] Since the inception of the program, FHA has insured 341 hospital
mortgages for $11.9 billion in 42 states and Puerto Rico. As of the end
of calendar year 2005, FHA was insuring 74 hospital mortgages totaling
nearly $5 billion.[Footnote 4] The number of loans insured annually has
increased in recent years, from 2 in fiscal year 2001 to 11 in fiscal
year 2005 (see table 1). According to the House report accompanying the
Hospital Mortgage Insurance Act of 2003, which revised the standards
for determining the need and feasibility for hospitals, as well as
eligibility requirements for small, rural hospitals, hospitals face
significant financial challenges when providing care to patients who
are covered by Medicare and Medicaid, as well as those that are
uninsured. At the same time, improvements in technology and health care
knowledge necessitate capital improvements such as additions and
renovations to existing buildings.
Table 1: Number of New Loans Insured through the Hospital Mortgage
Insurance Program Since 2001:
Fiscal year: 2005;
Loans insured: 11.
Fiscal year: 2004;
Loans insured: 6.
Fiscal year: 2003;
Loans insured: 7.
Fiscal year: 2002;
Loans insured: 1.
Fiscal year: 2001;
Loans insured: 2.
Source: FHA.
[End of table]
FHA's Office of Insured Health Care Facilities and HHS' Division of
Facilities and Loans coordinate to implement the hospital program. HUD
has statutory responsibility for the program based on the FHA's
experience with promoting housing construction through housing mortgage
insurance programs. As such, HUD is fully responsible for management of
the program, including developing and proposing legislation, policy
development, strategic planning, and approval of applications and loan
documents. The House Committee on Banking and Currency, in recommending
that HUD be given this responsibility, expected HUD to draw upon HHS's
hospital expertise to devise standards for insuring hospitals'
mortgages. Through an interagency agreement, HUD formally delegates
authority to HHS to assist in the review of applications for mortgage
insurance and the monitoring of insured loans. HHS is also given full
responsibility for construction monitoring. See appendix II for
additional information about FHA and HHS's loan processing
responsibilities.
FHA's Hospital Mortgage Insurance Program generally serves the segment
of the market consisting of hospitals that are too risky to obtain
private bond insurance but are strong enough to pass FHA's underwriting
tests. Mortgage insurance, like private bond insurance, guarantees that
lenders will be paid if the hospital stops making payments on its loan.
In addition, both mortgage insurance and private bond insurance are
forms of credit enhancement and improve the credit rating of the
underlying debt for the insured entity, resulting in a lower interest
rate for the loan. Hospitals with FHA-insured mortgages automatically
receive investment-grade ratings (AA or AAA) because the reliability of
the cash flows from the mortgage note are rated on the insurer's, not
the hospital's, ability to repay the debt. Both FHA and HHS officials
and private insurers agree that FHA's Hospital Mortgage Insurance
Program serves a different market than private insurers. According to
FHA and HHS officials, FHA insures loans that are too risky, too small,
or too large for private insurers, or are located in a market not
served by private insurers.
For the Hospital Mortgage Insurance Program, if a hospital fails to
make any payment due under the mortgage, the mortgage is in default. If
a default continues for 30 days, the lender is entitled to receive
benefits from FHA. FHA may pay claims in either cash or
debentures.[Footnote 5]
Federal agencies that provide direct loans or loan guarantees are
required by the Federal Credit Reform Act of 1990 to estimate the
expected cost of programs by estimating or predicting their future
performance and reporting the costs to the government in their annual
budgets. Such estimates are important in that they more accurately
measure the government's costs of federal loan programs and permit
better cost comparisons among different programs. Under credit reform
procedures, the cost of loan guarantees, such as mortgage insurance, is
the net present value of all expected future cash flows, excluding
administrative costs.[Footnote 6] For guarantees, cash inflows consist
primarily of fees and premiums charged to insured borrowers and
recoveries on assets, and cash outflows consist mostly of payments to
lenders to cover the cost of claims. Agencies discount projected future
cash flows to the year in which the guaranteed loan was disbursed. The
discounted cash flows are the estimated budgetary cost or gain of the
cohort of loans obligated in a given fiscal year.[Footnote 7] The net
present value of each cohort's estimated cash flows is expressed as a
percentage of the volume of guaranteed loans in the cohort--that is, a
subsidy rate. Agency managers are responsible for accumulating
relevant, sufficient, and reliable data on which to base their credit
subsidy estimates. OMB has final responsibility for determining subsidy
estimates, in consultation with agencies.
FHA's Selection Process Includes Additional Steps Compared with Private
Insurers, but Monitoring Techniques Are Similar:
FHA requires hospitals to take certain steps, both before they apply
for mortgage insurance and as a part of the application process, that
private insurers do not mandate. These additional steps are used
because FHA insures mortgages that are generally riskier than those
using private bond insurance. For example, before they apply for
mortgage insurance, FHA advises hospitals to compare their financial
status with the program's minimum requirements. If they meet these
requirements, FHA requires hospitals to submit market and financial
information so that FHA can make a preliminary assessment about the
project and determine whether to conduct a preapplication meeting with
the applicant to discuss the project. None of the private insurers that
we met with have similar preapplication processes.
After these preapplication steps are met, FHA's application process
includes additional steps compared with those of private bond insurers.
FHA requires hospitals to submit a financial feasibility study
containing historic and forecasted financial statements and ratios, a
financing plan, and information about market demand, among other
things. In addition, FHA hires consultants to evaluate the feasibility
of each proposed project as an additional, independent check on the
viability of the project. While the private bond insurers that we met
with review the types of information included in feasibility studies,
they do not require hospitals to submit such studies and do not hire
consultants to assess the feasibility of proposed projects.
FHA's application process also includes a final level of review that is
absent from private bond insurer processes. After an application for
mortgage insurance has gone through underwriting and been reviewed by
an independent consultant, it is considered by the program management
group, a group of senior-level FHA and HHS staff. FHA also refers to
this group as its "credit committee." Similarly, private bond insurers
also consider applications within a credit committee structure.
However, while private bond insurers make final insurance decisions
through their credit committees, FHA has an additional layer of review.
Based upon input from the program management group, the Director of
FHA's Office of Insured Health Care Facilities makes a recommendation
to the FHA Commissioner, who then makes the final decision.
It generally takes FHA longer to process applications than it takes
private bond insurers. According to program data, it took FHA an
average of 265 days to process the 11 applications for hospital
mortgage insurance that it endorsed in fiscal year 2005.[Footnote 8]
According to the FHA, processing times vary with the complexity of the
project and may be affected by issues requiring a hospital to rethink
or resubmit its application, including issues that are beyond HUD's
control. In contrast, according to the private bond insurers and
investment bankers that we interviewed, it generally takes private
insurers up to 60 days to process an insurance application, sometimes
less. While FHA's average processing time is higher than private bond
insurers, it has decreased from an average of 399 days in fiscal year
1999. According to FHA, processing times have improved as a result of
implementing the preliminary review process, which disqualifies
hospitals that don't meet the program's minimum requirements.
FHA uses many of the same techniques that private insurers use to
monitor insured hospitals. Both FHA and private bond insurers identify
the riskiest hospitals in their portfolio for closer monitoring. Since
November 1999, FHA has placed on a priority watch list hospitals it
determines are at risk of having a claim filed within the next 12
months. FHA considers a hospital for inclusion on the priority watch
list if certain financial criteria are not met. For example, if the
ratio measuring a hospital's ability to pay its mortgage payments with
cash generated from current operations (the debt service coverage
ratio) falls below an acceptable level, the hospital may be placed on
the watch list.[Footnote 9] A hospital can also be placed on the list
if FHA becomes aware of other conditions at the hospital, such as
management or personnel problems. As of December 2005, FHA data showed
that 11 of the 59 insured hospitals are on this list, representing an
unpaid (insured) principal balance of approximately $762 million.
Private insurers also assess the risk of the hospitals that they insure
in order to identify those that should be monitored more closely. For
example, one private bond insurer explained that they monitor
compliance with loan agreements by reviewing financial statements,
documentation of payer mix (i.e., proportion of reimbursement from
Medicare, Medicaid, private insurance, etc.), and notices of
litigation, among other things.
As a part of their monitoring efforts, both FHA and private bond
insurers monitor agreements that exist between themselves and the
insured hospital.[Footnote 10] These agreements specify the
requirements that the insured hospital must comply with in order to
maintain the insurance. Agreements may cover issues such as the debt-
service coverage ratio; liquidity, or the ability to convert assets to
cash; and activities that a hospital cannot do without approval by the
insurer. Both FHA and private insurers require hospitals to request
waivers from agreement requirements if they are not going to meet them.
FHA and private insurers monitor hospitals' compliance with these
agreements through various means, such as by evaluating changes in
indicators of financial performance, as reported in hospitals'
financial statements. For example, one private bond insurer reported
that it monitors hospitals' cash on hand, and FHA monitors hospitals'
debt-service coverage ratios. FHA and private insurers monitor
financial statements and other documentation quarterly and annually,
respectively, and more frequently for hospitals that are experiencing
financial difficulty. Both FHA and private insurers require hospitals
that are not in compliance to correct violations within specific time
frames.
Both FHA and private insurers can require hospitals experiencing
financial difficulties to hire consultants. In some cases, FHA will pay
for consultants to identify and suggest solutions to hospitals'
financial difficulties. According to FHA, since fiscal year 2000, it
has paid $1.3 million for consultant's studies of 27
hospitals.[Footnote 11] However, FHA can also require hospitals to hire
and pay for consulting services on their own. Similarly, private
insurers can require hospitals to hire consultants to assist them with
identifying and addressing problems. The requirement for a hospital to
hire a consultant can be triggered if a hospital is not in compliance
with its loan agreements, according to both FHA and private bond
insurers.[Footnote 12]
Agencies Coordinate Key Activities, but FHA Does Not Track Most
Performance Measures:
FHA and HHS coordinate key activities, including screening applicants,
underwriting loans, and monitoring insured hospitals. While FHA has
established performance measures for both coordinated tasks and tasks
delegated to HHS through an interagency agreement, it does not collect
data with which to assess most of these measures. FHA's primary
guidance for the program has not been updated in over 20 years and,
therefore, does not reflect key changes in eligibility criteria.
FHA and HHS Coordinate Their Client Screening, Application Review, and
Loan Monitoring Activities:
FHA and HHS coordinate to implement the hospital program based upon
FHA's experience with promoting housing construction through its
housing mortgage insurance programs and HHS's hospital and health care
expertise. As previously noted, FHA is responsible for management of
the program and formally delegates certain responsibilities to HHS. A
Memorandum of Agreement (MOA) between FHA and HHS outlines the duties
and responsibilities of each agency in carrying out the Hospital
Mortgage Insurance Program, including coordinated activities and tasks
that FHA delegates to HHS.[Footnote 13] In accordance with this
agreement, both FHA and HHS staff are involved with the screening of
applicants during the preapplication meetings. FHA's policy is to
include senior FHA staff and legal counsel, the account executive and
client service team members (both of which can be either FHA or HHS
staff), and engineering staff from HHS, among others, in such
meetings.[Footnote 14] This policy helps insure that preapplication
discussions with applicants are coordinated between FHA and HHS.
FHA and HHS also coordinate activities during the underwriting review
portion of the application process, which is the process used by FHA to
assess the risk of a potential loan to the GI/SRI fund. The nature of
coordination at this level depends on the staffing of the account
executive and client service team positions, since these positions can
be filled by either FHA or HHS staff or a combination of both. The
account executive and client service team are responsible for
underwriting activities, including analysis of the market and financial
feasibility of the project. In addition, HHS engineers review all
design and construction aspects of the proposed project. Appendix II
presents the roles and responsibilities of each agency in more detail.
FHA and HHS use regular meetings of the program management group to
coordinate additional activities. This group, composed of senior FHA
and HHS staff, meets weekly to assist account executives and client
service teams as they review applications for mortgage insurance and
monitor insured hospitals. Minutes of program management group meetings
that we reviewed show joint FHA and HHS discussion of new applications,
as well as issues associated with the existing portfolio. According to
investment bankers, hospital associations, consulting firms, and
selected hospitals we spoke with, coordination between FHA and HHS is
generally seamless.
FHA Has Not Used Performance Measures to Manage the Program:
The fiscal years' 2002-2005 MOA between FHA and HHS provides for FHA to
establish performance measures and use them to evaluate tasks.[Footnote
15] While the MOA between FHA and HHS contains 22 performance measures,
FHA has tracked actual performance for only 2 of these measures, 1 for
processing complete applications within 120 days, and 1 for processing
loan modification requests within 30 days. As a result, it is not
possible to evaluate how well the agencies perform in implementing the
program. According to FHA officials, the agency never intended to track
these measures, or use them as actual measures of performance, but
rather to show FHA's expectations of HHS. Neither HUD's fiscal year
2005 performance plan nor its performance and accountability report
includes other performance measures for this program. Moreover, OMB did
not assess this program as a part of its fiscal year 2005 Program
Assessment Rating Tool (PART), which is used to assess the performance
of federal programs. Appendix III provides more detailed information
about the 22 performance measures contained in the MOA between FHA and
HHS.
Analysis of the two performance measures for which data is collected
shows that FHA is not meeting its performance goals for those measures.
Based upon analysis of data from the Hospital Mortgage Insurance
Management Information System, we determined that FHA did not meet its
goal of processing 75 percent of hospital mortgage insurance
applications within 120 days. Although the FHA received no more than 10
applications each year between fiscal years 2002 and 2005, FHA and HHS
never processed more than 2 within 120 days (see fig. 1).
Figure 1: FHA Did Not Process Most Hospital Mortgage Insurance
Applications within Targeted Time Frame:
[See PDF for image]
[End of figure]
In addition, according to FHA, the agency did not meet its goal of
processing at least 75 percent of loan modification requests within 30
days.[Footnote 16] However, analysis of available data shows that FHA
and HHS improved from processing 45 percent of loan modification
requests received in fiscal year 2002 within 30 days to processing 71
percent in fiscal year 2005.
FHA has not tracked other performance measures related to activities
that are coordinated, or can be done, by both FHA and HHS staff. For
example, according to one performance measure, hospitals with a
weakening financial position should be identified early enough to allow
time for the account executive to provide technical assistance and
undertake default prevention measures. Since such hospitals are
identified through the FHA's priority watch list system, these data are
readily available for measurement. Similarly, another performance
measure is designed to capture the soundness of analysis performed by
client service teams, which can include both FHA and HHS staff, in
assessing insurance applications. FHA has also not tracked this
measure.
FHA also does not track performance measures of activities that it
delegates to HHS. For example, one measure is designed to capture the
number of complaints and compliments about HHS's timeliness,
helpfulness, courtesy, and understanding. According to FHA, the agency
has not tracked this or other measures because it has not had enough
problems with HHS to warrant establishing a tracking system and that
establishment of such a system would be both an administrative burden
and a poor use of their resources. However, without collecting
appropriate information, FHA cannot quantify the input it receives
about HHS. In addition, FHA has not tracked performance measures
related to construction design and monitoring, which HHS is responsible
for. According to FHA, performance measures exist to indicate FHA's
expectations of HHS's performance, even though HHS's performance is not
tracked.
Several of the performance measures contained in the agreement between
FHA and HHS lack the necessary characteristics of performance measures;
that is, they are not measurable or objective. As a result, they do not
provide useful information about the performance of the hospital
program. For example, the measures related to the number of complaints
and compliments about HHS are not measurable in that they do not
specify a quantifiable threshold for expected performance. As a result,
even if FHA tracked complaints, it is not possible to tell whether
performance is meeting expectations. Other goals lack objectivity in
that they require subjective judgment to assess program performance. As
an example, one performance measure indicates that "plans and
specifications do not need major revisions during the construction
process because of significant architectural or engineering errors."
Another indicator states that "preconstruction meetings are thorough
and do not precipitate delays in application processing." In both
cases, the performance measures require subjective judgment, because
they do not make explicit what constitutes "major," "significant," or
"thorough." As we have previously reported, useful performance
information is based upon measurable and objective performance
measures.[Footnote 17] If useful performance information is collected,
managers could use it to identify problems, try to identify the causes
of problems, and/or to develop corrective actions.[Footnote 18] (App.
III provides a complete list of the performance measures.)
While FHA does not track most of the performance measures outlined in
the MOA, FHA's Hospital Mortgage Insurance Management Information
System captures a significant amount of quantitative and qualitative
data about the performance of the program, which could be incorporated
into measurable and objective performance measures. This system
captures key loan processing dates, financial performance data over
time, and documentation of internal meetings and actions performed by
both agencies to assist insured hospitals. Incorporation of this
readily-available data into meaningful performance measures would
enable FHA to better assess its management of the program.
FHA and HHS established a new interagency agreement covering fiscal
years 2006 through 2010, which includes many of the same measures as
the previous agreement, including those that are not measurable or
objective. The new agreement also includes a requirement that HHS
provide FHA with an annual report detailing its performance against
each of the performance measures in the agreement. However, this
interagency agreement does not specify whether and how FHA will track
its own performance against the measures.
Program Guidance Is Not Up to Date:
FHA's primary guidance for its hospital mortgage insurance program has
not been updated in over 20 years and does not reflect changes to the
program over that time. As a result, this document does not contain
current eligibility requirements, which may cause confusion for
potential applicants. In 1973, FHA published the Mortgage Insurance for
Hospitals Handbook and last updated the handbook in 1984. The purpose
of the handbook is to provide complete information about the processing
of hospital mortgage insurance, including basic program features and
requirements, to hospitals, lenders, sponsors, FHA and HHS personnel,
and all other interested parties. According to FHA, the Office of
Insured Health Care Facilities has not had adequate staff to revise the
handbook and is waiting for a proposed regulation to become final
before revising it. Since the handbook has not been updated since 1984,
it does not contain current eligibility requirements, policies, and
processing procedures. As we have previously reported, internal control
standards applicable to federal programs provide that information
should be recorded and communicated in a timely manner.[Footnote 19]
The handbook does not reflect key changes that the Hospital Mortgage
Insurance Act of 2003 made to the program. This act revised the
existing requirement that hospitals applying for FHA mortgage insurance
have either a Certificate of Need or a state-commissioned study of
market need; specifically, it provided that FHA would establish the
means for determining market need and feasibility for
hospitals.[Footnote 20] In addition, the 2003 act exempted Critical
Access Hospitals (CAH) from the requirement that at least 50 percent of
care must be for general acute-care patients.[Footnote 21] According to
one of the mortgage bankers that we met with, the handbook causes
confusion because hospitals are uncertain about requirements applicable
to them.
As we have previously reported, internal control standards provide that
information, such as changes in eligibility requirements and
application processing procedures, should be communicated in a timely
manner. While FHA publicly communicates program changes through
Mortgagee Letters, updating the Applicant's Guide, distributing copies
of its minimum criteria for consideration, and updating its Web page,
it has not incorporated all of this updated information into the
program's handbook. All documentation, including the handbook, should
be updated in a timely manner.[Footnote 22] Maintaining current
documentation is an internal control that would benefit both those
interested in the program and those that administer the program.
Potential Risks Exist Although FHA Has Mitigation Strategies in Place:
The hospital program is a relatively small program within the broader
GI/SRI fund and has a record of recovering claims. Despite its small
size, both program and market trends show risks that could affect the
hospital portfolio. FHA has mitigation strategies in place to address
some risks but does not have a formal strategy to geographically
diversify the hospital loan portfolio.
The Hospital Program Accounts for a Relatively Small Share of the
Broader GI/SRI Fund, and Has Recovered a Majority of All Claims:
The Hospital Mortgage Insurance Program comprises a relatively small
part of the GI/SRI fund, representing about 2.9 percent of the GI/SRI's
fund's fiscal year 2006 total commitment authority.[Footnote 23]
Moreover, the approximately $5 billion in loans that FHA currently
insures through the program is 6.5 percent of the $77 billion in unpaid
principal balance of the fund (see fig. 2). In addition to being a
financially small component of the broader GI/SRI fund, the Hospital
Mortgage Insurance Program has a record of recovering more than two-
thirds of all historical claims, and lenders have not made a claim on
an insured loan since 1999. Since the program's inception in 1968,
there have been a total of 22 claims totaling $225 million. Of this
amount, FHA recovered 68 percent, or $153 million.
Figure 2: Hospital Mortgage Insurance Program Comprises a Relatively
Small Part of the GI/SRI Fund:
[See PDF for image]
[End of figure]
Loan Performance and Market Trends Reveal Sources of Potential Risks:
In spite of the hospital program's relatively small size and the
relatively good performance history of insured loans, analysis of both
program and market trends shows risks that could affect the future
performance of the hospital loan portfolio. For example, the average
loan size insured through the program has varied over time but has been
increasing from about $26 million in 2002 to over $122 million in 2005.
This growth creates financial risk because a claim from one large loan
could have a significant impact upon the program.
In addition, the majority of the currently insured loans in FHA's
hospital portfolio are less than 10 years old. According to HUD, 70
percent of claims have historically occurred prior to a loan's tenth
year. Currently, the loans that have been insured for less than 10
years have an aggregate unpaid principal balance of $2.8 billion,
representing about 57 percent of the aggregate unpaid principal balance
(see fig. 3).[Footnote 24]
Figure 3: Proportion of FHA Hospital Loans That Have Been Insured Less
Than 10 Years:
[See PDF for image]
[End of figure]
Comparing FHA data on selected financial indicators with the criteria
the agency uses to determine the financial health of program applicants
shows some favorable trends but also indicates sources of potential
financial risk (see fig. 4). Specifically, our analysis of program data
for calendar years 2000 to 2004 shows that some insured hospitals
increased their ability to meet their monthly and future mortgage
payments. For example, the median debt-service coverage ratio, a
measure of a hospital's ability to pay its mortgage with cash generated
from current operations, increased from 1.54 to 2.18. While a value of
2.18 for this ratio indicates a low level of risk, according to FHA
criteria, other financial indicators indicate medium levels of
risk.[Footnote 25] For example, the median number of days of cash on
hand and the median current ratio (which compares a hospital's current
assets to its current liabilities) both improved, yet still indicate a
medium level of risk to the program. Finally, the median operating
margin, which is indicative of a hospital's ability to control costs
and expenses, improved between 2000 and 2004, yet indicates a medium
level of risk based on FHA's criteria.
Figure 4: Selected Median Financial Indicators Show Varying Levels of
Risk:
[See PDF for image]
[A] The N for debt-service coverage ratio differs slightly. It is 36 in
2000, 41 in 2001, 42 in 2002, 44 in 2003, and 49 in 2004.
[End of figure]
Median financial indicators for the 11 hospitals that FHA has placed on
its priority watch list show much greater levels of risk when compared
with FHA's underwriting guidelines (see fig. 5). For these hospitals,
performance as measured by all four selected indicators declined from
2000 to 2004. Further, in 2004, three indicators showed a high level of
risk, based on FHA's criteria. For example, according to FHA's
criteria, an applicant with an operating margin of less than zero is
considered high risk. The hospitals on FHA's priority watch list had
median operating margin of -2.65 in 2004. Similarly, according to FHA's
criteria, an applicant with less than 15 days of cash on hand is also
high risk, and hospitals on the priority watch list had a median of 3.3
days of cash on hand in 2004. FHA recognizes that the high risk levels
of these selected financial indicators are among the reasons that these
hospitals are on its priority watch list and are, therefore, subject to
closer monitoring to reduce the risk of a claim.
Figure 5: Selected Median Financial Indicators Show High Levels of Risk
for Priority Watch List Hospitals:
[See PDF for image]
[End of figure]
Analysis of program data further shows that, while loans are
increasingly being insured outside of the Northeast, the program is
still concentrated in New York (see fig. 6). Though the percentage of
the unpaid principal balance concentrated in New York has decreased
from 89 percent in 2000, 61 percent of the unpaid principal balance in
the program remains concentrated in New York in 2005. Of the 30
hospital loans that FHA has insured since 2000, 21 are outside of New
York, and 19 are outside of the Northeast region. Since 2003, 5 of the
loans insured were for CAHs.
Figure 6: FHA Loans Remain Concentrated in the Northeast as of December
2005: Active Loan Dollar Amount and Number of Loans by State:
[See PDF for image]
[End of figure]
Further, 24 out of 25 mortgage insurance applications in development at
the time of our study are located outside of the Northeast (see fig.
7).[Footnote 26]
Figure 7: Applications for Hospital Mortgage Insurance are
Geographically Dispersed as of December 2005: Application Dollar Amount
and Number of Applications by State:
[See PDF for image]
[End of figure]
Despite these strides, the high concentration of the program's unpaid
principal balance in New York, as well as concentrations with single
borrowers with multiple loans, creates risks. New York hospitals
insured through FHA, like hospitals nationwide, rely heavily upon
reimbursement through Medicare and Medicaid.[Footnote 27]Since a
portion of Medicaid funding comes from states, any cuts made by the
state of New York could have an especially negative impact on the
hospital program. Insured hospitals in New York are also vulnerable to
other state policies. For example, a task force appointed by the
Governor is in the process of identifying New York hospitals for
closure or restructuring. The Governor and state legislature have
committed state funds to assist in restructuring efforts, and the state
has had a history of helping its hospitals avoid defaults.
Nevertheless, any recommendations for the closure or restructuring of
FHA-insured hospitals may present the risk of an insurance claim.
Further, some New York hospitals have multiple loans insured through
the program, one with unpaid principal balances totaling approximately
$828 million as of December 2005. According to HUD's comments on the
draft of this report, this hospital is a financially sound, well-
endowed institution that poses a low risk of default.
Industry Trends Pose Risks to Hospitals, Including Those with FHA
Insured Mortgages:
The hospital program may also face risks from changes in the health
care industry at large. According to industry literature, decreasing
revenue streams, increases in the number of uninsured patients,
increased competition from specialized facilities, and heightened
capital needs are some of the trends that affect all hospitals,
including FHA-insured hospitals.
We and others have reported that Medicare and Medicaid spending may not
be sustainable at current levels.[Footnote 28] If program cuts occur in
Medicaid, for example, states may take cost containment measures to
reduce spending.[Footnote 29] Such measures may include frozen, or
reduced, reimbursement rates to providers and restrictions on
eligibility for these programs.[Footnote 30]In addition, the number of
Medicare enrollees is projected to increase as baby-boomers age and
become Medicare-eligible.[Footnote 31] These trends will affect all
hospitals, including FHA-insured hospitals, which generally have
Medicare and Medicaid patients in their payer mix. On average, Medicare
discharges for FHA-insured hospitals represented 29 percent of total
discharges per hospital, and Medicaid discharges represented 19 percent
of total discharges per FHA-insured hospital.[Footnote 32] (See fig. 8
for Medicare and Medicaid discharges by state.) Stated another way,
nearly 50 percent of the reimbursement that program hospitals receive
is through Medicare and Medicaid.
Figure 8: FHA-Insured Hospitals Have Medicare and Medicaid Payers among
Their Patient Discharges:
[See PDF for image]
Note: More than 90 percent of these data have undergone basic edit
checks; however, Centers for Medicare & Medicaid Services (CMS) has not
yet determined whether these data require an audit. These data may
change as they undergo further review by CMS. In addition, CMS does not
enforce dates by which hospitals must report data. Thus, only 49 of the
59 FHA hospitals active as of October 2005 had provided data for 2003.
[End of figure]
Hospitals, including FHA-insured hospitals, must also contend with the
rising number of underinsured and uninsured patients, which place
demands on hospitals to provide care with little to no reimbursement.
According to the U.S. Census Bureau, the number of uninsured persons
rose from under 40 million people in 2000 to approximately 45 million
people in 2003. This trend may pose a risk to the program. In addition,
hospitals in New York, where the hospital mortgage insurance is
concentrated, serve a high proportion of uninsured patients.
Credit rating agencies state that competition is increasing in the
health care market as the type of care provided shifts to outpatient
and specialty hospitals, which provide profitable services, such as
cardiology, surgery, orthopedics, and diagnostic imaging.[Footnote 33]
Specialty facilities providing these services can take patients and
revenue from general acute-care hospitals, which supplement revenue
shortfalls with profitable services after providing needed, but
unprofitable, services to the community. The growth of specialty
hospitals, such as ambulatory surgery centers, is strong. The average
number of specialty hospital openings has increased from 5 hospital
openings in the 1960s to 27 hospital openings in the 2000-present time
period.[Footnote 34]
Hospitals throughout the health care sector face increasing capital
demands, yet many have limited access to capital according to hospital
industry literature.[Footnote 35]For example, hospitals face demand for
outpatient services, emergency room upgrades, and technological
advancements, which have significant up-front and maintenance costs. A
reputable credit rating agency estimates that information technology
expenditures now range between 20 to 30 percent of a hospital's capital
budget. Financially weaker hospitals have less access to capital, yet
often have pent-up capital needs. According to a recent rating agency
report, New York hospitals have unmet capital needs as a result of
their older infrastructure and because they are generally financially
weaker than the average hospital.[Footnote 36]
FHA Uses Tools to Mitigate Risk:
FHA uses a variety of tools to mitigate risk in the hospital program.
For example, during its preliminary assessment of a hospital, FHA
reviews the hospital's ability to pay its mortgage by analyzing its
debt service coverage ratio and determines if this ratio meets FHA's
minimum requirement.[Footnote 37] FHA takes other steps when reviewing
applications (as discussed previously) designed to keep out excessively
risky projects and also imposes requirements on insured hospitals to
control risks. These include:
* assessing the viability of projects at preapplication meetings with
key hospital representatives;
* using a comprehensive underwriting process that assesses, among other
factors, past and projected financial performance and the demand for
the hospital's services;
* hiring an independent consultant to evaluate the feasibility of the
proposed project and its potential risk to the FHA;
* requiring insured hospitals to establish a cash reserve fund
sufficient to cover 2 years of mortgage payments;[Footnote 38]
* requiring insured hospitals to maintain compliance with key
agreements between the hospital and FHA and monitoring these
agreements;[Footnote 39] and:
* considering insured hospitals that fail to meet certain financial
criteria for placement on the priority watch list.[Footnote 40]
FHA has also made some efforts to address the risks associated with the
geographic concentration of the program in New York. Since 1999, FHA
has had goals for geographically diversifying the hospital portfolio.
Currently, FHA's goals for diversifying the portfolio include reviewing
and processing applications for projects in states other than New York.
While the agency does not have a formal strategy for marketing the
program outside of New York, it has made some efforts to diversify the
hospital portfolio by:
* simplifying its application process for CAHs and providing rural
hospital associations with information about the program;
* hiring an expert in rural hospitals;
* visiting hospital association conferences to educate members about
the program; and:
* educating HUD field attorneys, mortgage bankers, and consultants
about the program.
HUD has also cooperated with requests for program information from the
trade media and assisted other researchers, which resulted in the
publication of articles and reports that provided information about the
advantages of the hospital program in financing capital projects. A
formal strategy, however, would provide the agency with a tool for
comprehensively planning for and executing activities that would lead
to the geographic diversification of the hospital portfolio. OMB
guidance, for example, requires that agencies include a description of
the means and strategies that will be used to achieve goals in their
strategic plans. Such strategies could include, for example, the
processes, skills, technologies, and various resources that will be
used to achieve goals.
HUD's Model for Estimating Credit Subsidy Costs Excludes Potentially
Relevant Factors:
HUD uses a model for estimating annual credit subsidies that does not
explicitly consider the impacts of some potentially important factors.
HUD's model incorporates factors and assumptions about how loans will
perform, including estimated claim and recovery rates, which are
consistent with OMB guidance. HUD has generally calculated a negative
subsidy rate for the hospital program, meaning that estimated cash
inflows have been greater than estimated cash outflows. However, HUD's
model does not explicitly consider the potential impacts of prepayment
penalties or restrictions when estimating prepayments, or the debt-
service coverage ratios of hospitals at the time of loan origination.
For budgeting purposes, agencies that make loans and provide loan
guarantees must estimate the costs to the government over the life of
the loans that will be insured, commonly referred to as the subsidy
cost. In order to estimate the subsidy cost of the Hospital Mortgage
Insurance Program, HUD uses a cash-flow model to project expected net
cash flows for all these loans over their entire life. HUD's model is a
computer-based spreadsheet that uses assumptions based upon historical
and projected data to estimate the amount and timing of claims,
subsequent recoveries from these claims, as well as premiums and fees
paid by the borrower. In addition, HUD does not consider prepayment
penalties and restrictions when it estimates the level and timing of
prepayments, which affect estimates of future claims and premiums.
HUD inputs its estimated cash flows into the OMB's credit subsidy
calculator, which produces the official credit subsidy rate. A positive
credit subsidy rate means that the present value of cash outflows is
greater than inflows, and a negative credit subsidy rate means that the
cash inflows are estimated to exceed cash outflows. For the hospital
program, cash inflows include premiums and fees, servicing and
repayment income from notes held in inventory, rental income from
properties held in inventory, and sale income from notes and properties
sold from inventory. Cash outflows include claim payments and expenses
related to properties and notes held in inventory.
Since the hospital program's inception, FHA has paid a total of 22
hospital mortgage insurance claims. The last claim was filed in 1999.
Because of the small number of claims, HUD determined that claim rates
based solely upon the program's historical claims experience would not
be reliable.[Footnote 41] As a result, HUD uses a methodology initially
developed by OMB to increase its estimated claim rate by assuming that
the lenders for some active hospitals would file claims for insurance.
HUD refers to this methodology as an artificial default.[Footnote 42]
In determining which loans to artificially default, HUD focuses on
hospitals that generally have a higher risk of default, and are
therefore on FHA's priority watch list.[Footnote 43] According to OMB
officials, the use of this artificial default accounts for the risk
that exists due to the low number of large size loans insured,
potential changes in Medicare or Medicaid reimbursement rates, and the
geographic concentration of the program in New York, which make the
program vulnerable to regional economic conditions.
In 10 of the 14 years that HUD has been estimating the cost of the
Hospital Mortgage Insurance Program under credit reform, HUD has
estimated that the present value of cash inflows from fees, premiums,
and recoveries from loans and properties sold would exceed the outflows
from claim payments and other expenses related to properties and notes
held in inventory. As a result, HUD calculated a negative credit
subsidy rate for the hospital program for these 10 years. In the other
4 years, HUD estimated positive or no credit subsidy costs for the
program. Figure 9 shows changes in the credit subsidy rate from 1992 to
2005.
Figure 9: Credit Subsidy Rates for the Hospital Mortgage Insurance
Program Have Generally Not Indicated a Need for Subsidies:
[See PDF for image]
[End of figure]
While HUD's model includes assumptions that are consistent with OMB
guidance, such as assumptions on estimated claim and recovery rates and
an artificial default methodology to supplement the claim experience,
HUD's model does not explicitly consider the potential impact of
prepayment penalties or restrictions, even though they can influence
the timing of prepayments and claims and collection of premiums.
Inclusion of initial debt-service coverage ratios, as a factor
predictive of defaults and claim rates into HUD's cash-flow model for
the hospital program, could potentially enhance HUD's estimate of the
subsidy cost of the program. According to some economic studies,
prepayment penalties, or penalties associated with the payment of a
loan before its maturity date, can significantly affect borrowers'
prepayment patterns.[Footnote 44] In turn, prepayments affect claims
because if a loan is prepaid it can no longer go to claim. According to
FHA officials, FHA does not place prepayment penalties on FHA-insured
hospital loans. However, according to the hospital program's
regulations, a mortgage loan made by a lender that has obtained the
funds for the loan through bonds can impose a prepayment penalty charge
and place a prepayment restriction on the mortgage's term, amount, and
conditions.[Footnote 45]
According to FHA officials and mortgage bankers, prepayment
restrictions on hospital loans are generally in the form of 10-year
restrictions on the prepayment of bonds. While FHA does not maintain
data specifically on insured hospitals' bond-financing terms,
prepayment restrictions are specified on the mortgage note, which is
available to FHA. Moreover, according to the Mortgage Insurance for
Hospitals Handbook, FHA has access to bond-financing terms because,
upon completion of bond issues, applicants are required to submit bond-
related documents to FHA so that FHA can verify that the fees, charges,
and other costs previously approved with respect to debt restructuring.
Incorporation of such data into the hospital program's credit subsidy
rate model could refine HUD's credit subsidy estimate by enhancing the
model's ability to account for estimated changes in cash flows as a
result of prepayment restrictions.
According to HUD officials responsible for HUD's cash-flow model,
prepayment penalties and restrictions are not incorporated into the
model because HUD does not collect such data. HUD officials added that,
even though the cash-flow model does not explicitly account for
prepayment penalties and restrictions, its use of historic data
implicitly captures trends that may occur as a result of prepayment
penalties and restrictions. However, by not explicitly incorporating
prepayment penalties or restrictions into the cash-flow model, HUD's
model is less able to estimate the impact of changes in prepayment
patterns of current and future cohorts.
HUD's cash-flow model also does not consider the initial debt-service
coverage ratio of hospital loans at the point of loan origination. By
initial debt-service coverage ratio, we are referring to the projected
debt-service coverage ratio that is considered during loan
underwriting. (HUD's cash-flow model does consider the current debt-
service coverage ratio of insured hospitals through its artificial
default methodology, which, as previously explained, includes hospitals
that are on FHA's priority watch list. This list may include insured
hospitals if, based upon the last available full year of data, their
debt-service coverage ratio is below 1.10.)
According to the HUD official responsible for HUD's cash-flow model,
the initial debt-service coverage ratio of a hospital at the point of
loan origination is not included as a part of the cash-flow model for
the hospital program because it (1) is not a cash flow, (2) does not
vary, and (3) has no predictive value. We agree that a debt-service
coverage ratio is not a cash flow. However, initial debt-service
coverage ratios potentially affect relevant cash flows, as do other
factors that are included in HUD's model but are also not cash flows,
such as prepayments. For example, the model considers estimated
prepayments because they potentially affect future cash inflows from
fees and future cash outflows from claim payments. Initial debt-service
coverage ratios are another important factor that may affect cash
flows, as loans with lower initial debt-service coverage ratios may be
more likely to default and result in a claim payment. They can also be
used to assess the financial health of either an applicant or a
hospital in the existing portfolio.
According to officials from FHA's Office of Insured Health Care
Facilities, the projected debt-service coverage ratio is most
meaningful for the third or fourth year projected, when construction is
most likely to be complete. Our analysis of projected debt-service
coverage ratios, which include the amount of new debt being insured,
shows that these ratios varied from 1.48 to 3.11 during the fourth year
projected.[Footnote 46] All other factors being equal, loans with a
debt-service coverage ratio of 3.11 are generally considered to have
less risk than a loan with only a 1.48 debt-service coverage ratio.
Finally, we also found that economic studies show mixed results
regarding the significance of the impact of debt-service coverage
ratios upon commercial mortgage defaults. Some studies find initial
debt-service coverage ratios to be statistically insignificant in
modeling commercial mortgage defaults.[Footnote 47] Other studies
indicate that initial debt-service coverage ratios are meaningful
factors in modeling default risk and are helpful in predicting
commercial mortgage terminations.[Footnote 48] Analysis of initial debt-
service coverage ratio information, which is available in underwriting
documents, may be used to identify trends or shifts in the overall risk
of the portfolios that should be considered when making credit subsidy
estimates. Further, current credit reform guidance calls for agencies
to use the best available data when preparing their credit subsidy
estimates.
Conclusions:
The Hospital Mortgage Insurance Program plays an important role by
insuring loans for capital improvements at hospitals that, due to their
greater financial risks, would otherwise face difficulty in accessing
capital. FHA's process for reviewing applications for mortgage
insurance, while somewhat lengthier and involving more steps compared
with those of private bond insurers, appears to be a reasonable
response to the generally riskier nature of the applicants. Further,
the agency's techniques for monitoring insured hospitals are quite
similar to those used by private insurers, and the program has operated
for several years without experiencing an insurance claim.
FHA and HHS appear to work together reasonably well in carrying out
their respective roles in administering the program. However, it is
difficult for us, FHA's managers, or the Congress to assess how well
the agencies perform in implementing the program because FHA has not
established a set of meaningful program performance measures or
collected the information needed to assess performance. We have
previously reported on the importance of agencies' collecting useful
performance information. If FHA collected useful performance
information, such as information based on measurable and objective
performance measures, the agency's managers could use it to identify
problems, try to identify the causes of problems, and/or to develop
corrective actions. Many program activities, including those delegated
to HHS, are recorded in FHA's Hospital Mortgage Insurance Management
Information System, and data from this system could be used to
establish and monitor useful performance measures. In addition, because
FHA has not updated the program handbook since 1984, hospitals,
lenders, investment bankers, health care financing agencies, and other
interested parties do not have ready access to a consolidated source of
current program eligibility requirements, policies, and procedures. The
lack of a consolidated source of current information may cause
confusion and delay hospitals' ability to prepare applications that
meet FHA's criteria. Further, outdated guidance in federal programs is
an internal control weakness.
Although it represents a relatively small part of HUD's GI/SRI fund,
the hospital program insures multimillion dollar loans that currently
total nearly $5 billion. The continued geographic concentration of
insured hospitals in the state of New York poses a source of financial
risk to the program. While this concentration has decreased from its
high of 89 percent of outstanding insured principal balance in 2000,
the current 61 percent represents a continuing concentration of credit
risk. As a result, the program is vulnerable to New York State
policies, such as the governor's call to restructure hospitals, as well
as regional economic trends. While FHA has taken steps in the right
direction, it does not have a formal strategy or plan for
geographically diversifying the hospital portfolio, which could enhance
current efforts to reach this goal.
HUD's cash-flow model used to estimate annual credit subsidy rates
appears to be consistent with applicable OMB guidance; however, it does
not explicitly take into account potentially useful factors such as
prepayment penalties and restrictions or the initial debt-service
coverage ratio of new loan cohorts. Although the program has not
experienced a claim for insurance since 1999, the increasing size of
loans insured, geographic concentration in New York and the Northeast,
and other factors pose risks to the program. Including additional
factors into HUD's model could potentially enhance the agency's
estimates of the subsidy cost of the program, provide HUD and
congressional decision makers with better cost data to assess the
program, and help assure that the program adequately addresses
financial risks.
Recommendations for Executive Action:
To improve management of the Hospital Mortgage Insurance Program and
reduce potential risks to the GI/SRI fund, we recommend that the
Secretary of Housing and Urban Development direct the FHA Commissioner
to take the following three actions:
* Establish measurable and objective performance measures for the
hospital program and collect appropriate information to regularly
assess performance against the measures.
* Update the program handbook to make publicly available current
eligibility requirements, policies, and procedures.
* Develop a formal strategy to geographically diversify its portfolio
of insured hospitals, including such elements as the processes, skills,
technologies, and various resources that will be used to reach
diversification goals.
To potentially improve HUD's estimates of the program's annual credit
subsidy rate, we recommend that the Secretary of Housing and Urban
Development explore the value of explicitly factoring additional
information, such as prepayment penalties and restrictions, as well as
the initial debt-service coverage ratio of hospitals, as they enter the
program into its credit subsidy model.
Agency Comments and Our Evaluation:
We provided a draft of this report to HUD and HHS for their review and
comment. In written comments from HUD's Assistant Secretary for Housing-
Federal Housing Commissioner, which incorporated comments from HHS, HUD
concurred with our four recommendations. However, the agency disagreed
with our presentation of certain aspects of the program, commenting
that the report's "critique of procedural and technical matters"
overshadowed the program's accomplishments. The Assistant Secretary's
letter appears in appendix IV, and a letter from HHS appears in
appendix V.
HUD expressed general agreement with the recommendations and noted
actions that it plans to take. Specifically, the agency agreed:
* to develop appropriate performance measures and implement data
collection procedures to evaluate both program and contract
administration;
* with the need to consolidate updated eligibility requirements,
policies, and procedures into an updated handbook, and stated its
intention to have the handbook finalized by the end of 2006;
* to develop a formal strategy to geographically diversify its
portfolio of insured hospitals, including such elements as the
processes, skills, technologies, and various resources that will be
used to reach diversification goals; and:
* to explore the value of explicitly factoring additional information,
such as prepayment penalties and the initial debt-service coverage
ratio of hospitals as they enter the program, during its annual review
of cash flow modeling techniques for the hospital program.
In disagreeing with our presentation of FHA's efforts to diversify the
hospital portfolio, HUD commented that diversification has been a top
program goal for many years. Our draft report acknowledged that FHA has
had goals for geographically diversifying the portfolio since 1999 and
provided examples of FHA's diversification efforts. However, in
response to the comments, we included additional examples of FHA's
efforts. HUD also commented that the report does not appropriately
emphasize the success that HUD and HHS have had in working together to
implement the hospital program. Our draft report acknowledged the
agencies coordinated involvement with key meetings, underwriting, and
monitoring. Further, as the letter from HHS observes, our draft report
concluded that the two agencies appear to be working reasonably well
together. Because we believe the report accurately characterizes the
relationship, we did not change it. Finally, HUD commented that the
report infers that (1) it has not maintained current policies and
procedures and (2) indicates that current eligibility requirements,
policies, and procedures are unavailable to the public. Our draft
report stated that the handbook does not contain current eligibility
requirements, policies, or processing procedures, and acknowledged that
FHA publicly communicates program changes through Mortgagee Letters.
Nevertheless, in response to HUD's comments, we revised the report to
include additional examples of FHA's efforts to communicate changes in
eligibility requirements, policies, and procedures. We also continue to
emphasize the value of updating all program documentation, including
the handbook.
HUD also offered comments regarding the report's presentation of risks
facing the hospital program, including potential cuts in reimbursement
from Medicare and Medicaid, the potential for closures of hospitals in
New York stemming from a commission appointed by the Governor, and the
large size of some loans. We recognize that potential cuts in
reimbursement from the Medicare and Medicaid programs are a risk factor
for hospitals in all states; however, New York is unique among states
in accounting for over half of the hospital program's insurance
portfolio. We revised the report to clarify that, due to this
concentration, any cuts that the state of New York makes to its
Medicaid program could have an especially negative impact. Regarding
the New York Governor's commission, we are aware that state funds are
available to assist in restructuring efforts, and that the Dormitory
Authority of the State of New York is committed helping its hospitals
avoid defaults. However, since there is no guarantee that FHA-insured
hospitals will be protected, we continue to believe that a
recommendation for their closure or restructuring may present the risk
of an insurance claim. Finally, we revised the report as HUD suggested
to note that the largest single exposure of $828 million is for a
hospital that, according to HUD, poses a low risk of default.
HUD commented that GAO's presentation of processing times for
applications is misleading because it does not mention that there can
be periods of time in which HUD cannot continue to process applications
due to factors that applicants must address and are thus beyond HUD's
control. Because HUD's system for tracking application processing times
does not capture such periods of time, it is not possible for GAO to
quantify their impact. Further, the report notes that processing times
vary with the complexity of the project and may be affected by issues
outside of HUD's control.
HUD took exception with our conclusion that it is difficult for us,
FHA's managers, or the Congress to assess how well the agencies perform
in implementing the program because FHA has not established a set of
meaningful performance measures and stated a belief that program
results indicate that the program is fulfilling its purpose. While our
report acknowledges that the program has had a good performance
history, the creation and use of performance measures can be used by
agency managers to improve a program's results. As we note in the
report, analysis of performance information helps managers identify
problems, identify the causes of problems, and develop corrective
actions. In addition, performance information can be used to develop
strategies, identify priorities, make resource allocation decisions,
and identify more effective approaches to program implementation.
HUD disagreed with our suggestion that it include such factors as
initial debt-service coverage ratio into its credit subsidy modeling
and noted that two of the studies that we cited found this ratio to be
statistically insignificant in predicting commercial mortgage defaults.
Our draft report in fact stated that economic studies have shown mixed
results regarding the significance of the impact of debt- service
coverage ratios on commercial mortgage defaults. However, we revised
the report to explicitly footnote studies that show initial debt-
service coverage ratios to be statistically insignificant and those
that indicate that this ratio is a meaningful factor in modeling
default risk. We also note that the two studies that found initial debt-
service coverage ratios to be statistically insignificant were both
based on the same, small data set. We acknowledge that HUD's cash- flow
model considers the current debt-service coverage ratio of insured
hospitals through its artificial default methodology. However, our
recommendation is to include the debt-service coverage ratios at
origination, so that the risk of loans at origination will be reflected
in the credit subsidy rates for the cohort.
Finally, our draft report stated that FHA estimates that hospital loans
are most likely to experience a claim during their tenth insured year.
In its comment, HUD stated that historically 70 percent of claims
occurred prior to a loan's tenth year. The statement in our draft
report was based on actual historical conditional claim rate data. HUD
subsequently provided additional information, which explained that the
conditional claim rate peaked due to a single claim with multiple
notes. As a result, we revised the report to reflect additional
information.
We are sending copies of this report to the Secretaries of the
Departments of Housing and Urban Development (HUD) and Health and Human
Services (HHS). We also will make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report or need
additional information, please contact me at (202) 512-8678 or
[Hyperlink, woodd@gao.gov]. Contact points for our Offices of
Congressional Relations or Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to the report
are listed in appendix VI.
Signed by:
David G. Wood, Director:
Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to review (1) the design and management of the
program, as compared with private insurance; (2) the nature and
management of the relationship between the Department of Housing and
Urban Development (HUD) and the Department of Health and Human Services
(HHS) in implementing the program; (3) the financial implications of
the program to the General Insurance/Special Risk Insurance (GI/SRI)
fund, including risk posed by program and market trends; and (4) how
HUD estimates the annual credit subsidy for the program, including the
factors and assumptions used.
To review the design and management of the Hospital Mortgage Insurance
Program we interviewed officials at both the Federal Housing
Administration's (FHA) Office of Insured Health Care Facilities and the
Division of Facilities and Loans within HHS' Health Resources and
Services Administration, and reviewed program policies, documentation
of application processes, laws, and regulations. To compare the
program's design with that of private insurers, we met with private
bond insurers and the Association of Financial Guaranty Insurers,
credit rating agencies, mortgage and investment banking firms, hospital
associations, and state health care financing agencies in New York and
New Jersey.[Footnote 49]
To describe how FHA and HHS coordinate the implementation of the
hospital program, we interviewed FHA and HHS officials about the
responsibilities for each agency in implementing the program. We also
reviewed the Memorandum of Agreement between FHA and HHS that describes
the division of duties and responsibilities between the two agencies
and organizational charts that depict FHA's organization, HHS's
organization, and the FHA-HHS interrelationship in program
administration. We analyzed the extent to which performance measures
related to interagency coordination were met by obtaining available
data from FHA and analyzing time frames for processing applications and
loan modification requests from the Hospital Mortgage Insurance
Management Information System (HMIMIS). We compared performance
measures with our criteria on performance measures and compared
performance measures in the 2002-2005 Memorandum of Agreement with the
performance measures in the 2006-2010 Interagency Agreement between FHA
and HHS to identify any changes.
To identify the financial implications of the program to the GI/SRI
fund, we interviewed and obtained documentation from FHA and HHS
program officials and analyzed FHA data on program portfolio
characteristics, including number and amount of loans by cohort,
current insurance-in-force, and geographic concentration of loans,
claims, and recoveries. Specifically,
* To obtain the number and amount of active and terminated loans, we
created a report from the HMIMIS database, which is updated monthly. To
assess the reliability of the HMIMIS data, we reviewed relevant
documentation, interviewed agency officials who worked with this
database, and conducted electronic testing of the data, including
frequency and distribution analyses. We determined the data to be
sufficiently reliable to obtain the number and amount of active loans.
We corroborated these data with the FHA's 2004 report to the
Congress.[Footnote 50] As of December 2005, the administrators provided
data from HUD's F-47 database, a multifamily database, to show (1) that
there were 59 active hospitals with 74 active loans in the Hospital
Mortgage Insurance portfolio and (2) that there had been 341 loans in
the portfolio since the inception of the program. To assess the
reliability of data from HUD's F-47 database, we reviewed HUD's
Hospital Mortgage Insurance Program Functional Requirements Document,
Procedures for Maintaining Group Records, and other relevant
documentation, interviewed agency officials who worked with this
database, and conducted electronic testing of the data, including
frequency and distribution analyses. Our assessment showed that two
loan records were lacking state data, and one record was lacking
hospital name data but were identified by a unique project number. FHA
administrators verified that these loans were endorsed long before
electronic loan records were maintained and that they were unable to
provide additional information. None of our analyses utilized the
missing data elements for the two projects; therefore, there was no
impact on this report. We determined the data to be sufficiently
reliable to describe the geographic concentration of loans in the
program.
* To determine the proportion of the Hospital Mortgage Insurance
Program to the larger GI/SRI fund, we reviewed a spreadsheet provided
by HUD's Office of Evaluation dated June 2005 on insurance-in-force for
the hospital program to that of the GI/SRI fund.
* To determine the risk posed by insurance claims to the Hospital
Mortgage Insurance Program, we analyzed spreadsheets with historic
claims and recoveries data provided by HUD's Office of Evaluation and
dated August 2005.
* To determine the geographic concentration of loans and loan
prepayment history in the program, we analyzed data current as of
December 31, 2005, in an extract of HUD's F-47 database. While we
obtained extracts from HUD's F-47 database in April 2005, October 2005,
and December 2005, all analyses from F-47 data in the report utilize
the December 2005 extract only.
We also compared data on four financial ratios including debt service
coverage, days cash on hand, current, and operating margin ratios
provided from HMIMIS, current as of December 2005, with applicant
criteria stated in the Manual of the Hospital Insurance Program.
To determine how FHA manages program risks, we interviewed FHA and HHS
program officials and reviewed the Mortgage Insurance for Hospitals
Handbook and manual to determine steps taken by the agency during the
application and monitoring phases of the insurance process. We analyzed
cash inflows to the program from income from notes held in inventory,
rental income from properties held in inventory, sales income from
notes, and properties sold from inventory. We also reviewed
documentation of cash outflows, such as claim payments and expenses
related to properties and notes held in inventory. To assess risk based
on geographic concentration, we identified the state with the highest
unpaid principal balance insured by the program. Finally, to assess
risk posed by the geographic concentration of the program's unpaid
principal balance, we extracted 2003 data from the Centers for Medicare
& Medicaid Services (CMS) database on Hospital Mortgage Insurance
Program hospitals active in 2005. We used CMS data to identify the
number of discharged patients whose services were paid for through the
Medicare/Medicaid programs from hospitals that have loans insured
through the program. More than 90 percent of these data have undergone
basic edit checks; however, CMS has not yet determined whether these
data require an audit. These data may change as they undergo further
review by CMS. In addition, CMS does not enforce dates by which
hospitals must report data. Thus, at the time of this report, only 49
of the 59 active FHA hospitals had provided data for 2003.
We conducted a literature review and interviewed numerous officials of
rating agencies and hospital associations to obtain information on
risks due to health care market trends. We conducted the following
academic literature searches: (1) Google's Scholar search engine using
the terms "hospital mortgage insurance," "nursing home mortgage
insurance," "hospital and default and FHA," "nursing home and default
and FHA"; (2) PubMed Web site using the terms "hospital mortgage
insurance" and "nursing home mortgage insurance;" and (3) HUDuser.org
Web site using the terms "hospital mortgage insurance," "nursing home
mortgage insurance," and "Section 242." We also searched for Inspectors
General and agency reports through HUD and HHS Web sites using the
terms "Hospital mortgage insurance" and "Section 242." Finally, we
conducted a search on our internal Web site to identify previous work
on the Section 242 program. The terms "hospital," "mortgage insurance,"
and "Section 242" were used for the period of January 1995 through
March 2005.
To determine how HUD estimates the annual credit subsidy rate for the
program, we interviewed program officials from HUD's Office of
Evaluation and program auditors from the Office of Management and
Budget (OMB), reviewed documentation of HUD's credit subsidy estimation
procedures, and reviewed the cash-flow model for the program. We also
compared the assumptions used in HUD's cash-flow model with relevant
OMB guidance and reviewed economic literature on modeling defaults to
identify factors that are important for estimation. Additionally, we
analyzed data provided by FHA on program hospitals' projected debt-
service coverage ratios (at the time of their loan application). HUD's
Budget Office provided the program's annual credit subsidy rates for
1992 and 1993, and we obtained this rate for years 1994-2005 from the
Federal Credit Supplement of the United States Budget.[Footnote 51]
Our review did not include an evaluation of underwriting criteria,
construction monitoring, or the need for the program. We conducted our
work in Albany, New York; Chicago, Illinois; New York, New York;
Paterson, New Jersey; Rockville, Maryland; and Washington, D.C.,
between February 2005 and January 2006 in accordance with generally
accepted government auditing standards.
[End of section]
Appendix II: FHA and HHS' Responsibilities in FHA's Hospital Mortgage
Insurance Program Loan Cycle:
Development: Conduct preliminary review of hospital proposed for
insurance;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Provide applicant guidance and feedback (including
preapplication conference);
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Conduct initial site visit to hospital;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Review and approve construction plans, specifications, and
contracts;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): No.
Development: Engage independent feasibility consultant;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Account Executive and review team recommend approval or
disapproval to the Program Management Group (PMG)[A];
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: PMG recommends approval or disapproval to the FHA
management[B];
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: FHA management recommends approval or disapproval to the
FHA Commissioner;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: FHA Commissioner makes final decision on whether to
insure;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Make final underwriting determinations, conduct any needed
legal reviews, issue firm commitment, close, and initially endorse
loan;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Conduct preconstruction conference, monitor construction
work, and process requests for advances of mortgage proceeds;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): No.
Development: Review cost certification, inform lender of maximum
insurable mortgage amount, and process final advance;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): No.
Development: Arrange final closing and finally endorse mortgage;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Loan management;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): No.
Development: Account Executive monitors hospital's performance by
periodically reviewing financial and utilization data;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Account Executive will receive, review, and recommend to
FHA management approval or disapproval of special requests and loan
modifications (for example, partial release of security, transfer of
physical assets, bond refundings, or major capital projects);
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Approve or disapprove special requests and loan
modifications;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Develop and carry out strategies for helping a troubled
hospital improve its financial condition and for preventing or curing
defaults;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Engage consultant to review finances and operations of a
troubled hospital and to make recommendations for a financial
turnaround plan;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Review quality and condition of insured hospital loan
portfolio;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Determine the amount of liability for loan guarantees and
credit subsidy rates;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Assignment;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): No.
Development: Receive/process assignment of loan and pay insurance
claim;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Review assigned hospital's operational performance and
financial condition and conduct site visits as needed;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Account Executives receive, review, and recommend to FHA
management approval or disapproval of proposed workout agreements,
mortgage modifications, or note sales;
Department of Health and Human Services (HHS): Yes;
Federal Housing Administration (FHA): Yes.
Development: Bill for and collect mortgage payments;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Disposition;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): No.
Development: Analyze hospital's situation, evaluate alternative uses,
secure appraisal, make decision to foreclose, and arrange and hold
foreclosure sale;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Contract for management services and repairs, as needed,
to protect asset if FHA is mortgagee-in-possession or acquires hospital
through foreclosure or deed-in-lieu;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Development: Develop marketing plan, advertise, and sell hospital;
Department of Health and Human Services (HHS): No;
Federal Housing Administration (FHA): Yes.
Source: FHA Hospital Mortgage Insurance Program staff.
[A] The Account Executive can be an FHA or HHS staff member. The review
team, or Client Service Team, can consist of FHA and/or HHS staff. The
PMG consists of both senior FHA and HHS staff.
[B] FHA's Director of the Office of Insured Health Care Facilities.
[End of table]
[End of section]
Appendix III: FHA Assessed Performance Using 2 of 22 Performance
Measures Included in the 2002-2005 Memorandum of Agreement:
Performance measure: Number of complaints from customers about the HHS
staff's lack of helpfulness, timeliness, courtesy, understanding, etc.
Number of compliments received for HHS staff's helpfulness, timeliness,
courtesy, understanding, etc;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No .
Performance measure: Preliminary information is provided within 2
business days of inquiry;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Time from receipt of complete application to
decision letter. Process 75% of complete applications within 120 days
of receipt;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? Yes.
Performance measure: There are no instances of incomplete applications
being received because applicant was not informed of application
requirements;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Soundness of analysis. HUD may consider the
following evidence that the team's analysis was flawed: (1)
deterioration, within 2 yrs of the recommendation for approval, of the
financial condition of an approved applicant due to conditions that
should have been detected in the review, or (2) the ability of a
disapproved applicant to subsequently obtain insurance elsewhere on
similar terms and conditions within 6 months of the recommendation for
disapproval;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Plans and specifications do not need major
revisions during the construction process because of significant
architectural or engineering errors or omissions made prior to or
during the application process;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Problems do not arise during the construction
period because of significant inconsistencies between contract
documents;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Preconstruction meetings are thorough and do not
precipitate delays in application processing for our customers;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Monthly inspection reports support the items and
amounts included in monthly draws;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Change orders are documented and recommendations
are supportable;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Length of time between the team's receipt of
monthly requisition package and submission of the team's analysis and
payment recommendation to HUD;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Hospital construction project is completed on time
and within budget, unless mitigating factors outside HHS's control
prevent this from happening;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Length of time between completion of construction
and recommendation for final endorsement. HHS accomplishes all
activities in a timely manner and provides assistance and works with
the hospital and contractor so as to minimize the length of time
between completion of construction and recommendations for final
endorsement;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Final recommendation package is complete,
documented, and supportable if any issues or challenges are raised in
relation to the construction phase of the project;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Customers with a weakening financial position
should be identified early enough to allow time for the Account
Executive (AE) to provide technical assistance and undertake default
prevention measures before a situation becomes an emergency;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Each AE will develop and maintain a file in HHS's
office on each customer with all pertinent information needed to
evaluate the customer's condition;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: AE's should not be "blindsided" by local, state,
and national developments that affect the viability of customers;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Each customer meeting the conditions above for
inclusion on the Priority Watch List (PWL) should be included on the
PWL reports provided to HUD;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: HHS's work should assist HUD's goal of zero claim
payments;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: Time from receipt of request to recommendation to
HUD. Performance target is to process at least 75% of complete loan
modification requests within 30 days of receipt;
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? Yes.
Performance measure: "Same as for insured loans;"
Coordinated task: Yes;
Task delegated to the Department of Health and Human Services (HHS):
No;
Measured by the Federal Housing Administration (FHA)? No.
Performance measure: HHS provides effective services to reduce or
contain costs to the FHA insurance fund for the following activities:
(1) transition into the HUD inventory; (2) stabilization of the
hospital including patient, physical, and financial concerns; (3)
marketing; and (4) disposition;
Coordinated task: No;
Task delegated to the Department of Health and Human Services (HHS):
Yes;
Measured by the Federal Housing Administration (FHA)? No.
Source: HHS, Office of Special Programs, Memorandum of Agreement
between the Department of Housing and Urban Development (HUD) and the
Department of Health and Human Services (HHS), 2001.
Note: Some performance measures refer to tasks that can be done by
either FHA or HHS officials, which we refer to as "coordinated tasks."
Other performance measures apply to tasks specifically for HHS, which
we refer to as "HHS-delegated tasks."
[End of table]
[End of section]
Appendix IV: Comments from the Department of Housing and Urban
Development:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT:
ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER:
WASHINGTON, DC 20410-8000:
FEB - 9 2006:
David G. Wood, Director:
Financial Markets and Community Investment:
United States Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Re: Draft report - Hospital Mortgage Insurance Program:
Dear Mr. Wood:
This responds to Ms. Lisa Moore's letter of January 23, 2006, to US
Department of Housing and Urban Development (HUD) Secretary Alphonso
Jackson, requesting comments on GAO's draft report on the Hospital
Mortgage Insurance Program. At the request of US Department of Health
and Human Services (HHS) Secretary Michael O. Leavitt, comments from
HHS have been incorporated into this response.
I would like to thank you for the positive comments on the program and
the helpful suggestions that are included in the report. However, as
discussed below, we believe that the report could place more emphasis
on what HUD has accomplished since the GAO last reviewed the program in
February 1996. The report's critique of procedural and technical
matters is allowed to overshadow the program's very real
accomplishments:
* The geographic concentration of HUD's portfolio of insured hospital
mortgages in New York State has been reduced from 89 percent in 2000 to
61 percent today, through an aggressive outreach and diversification
effort. Further reductions will occur as HUD processes the pipeline of
new loan applications. Diversification is occurring because HUD has
pursued a multifaceted marketing strategy that includes presenting
program information at a variety of hospital industry forums, providing
training to mortgage lenders in various regions, adapting program
requirements to the needs of Critical Access Hospitals, permitting
physician-owned hospitals that comply with regulations governing self-
referrals to use the program, streamlining procedures to reduce
processing times and increase user-friendliness, and providing program
information to national and regional publications.
* In the last ten years, FHA has insured an additional 49 hospital
mortgages. This has provided $3.5 billion in needed capital financing
to finance the construction and improvements of hospitals in 21 states,
including 5 critical access hospitals serving rural areas and
facilities in inner cities and other economically distressed areas.
This not only provides valuable employment opportunities, but improves
health care for generally underserved populations.
* The FHA's hospital program has incurred only one claim out of 149
mortgages at risk during the past ten years. This was accomplished
despite the fact that the program makes credit available to hospitals
that pose a financial risk greater than those served by private
insurance.
* Although HUD is accountable, it has worked in partnership with the
Department of Health and Human Services to streamline and make more
effective the review of loan applications. It has also strengthened the
management of the portfolio of insured loans to avoid mortgage
defaults, including offering comprehensive and intensive assistance to
financially weak hospitals. To make this possible, HUD has expanded the
Office of Insured Health Care Facilities from five to eleven staff
members with extensive experience in hospital finance and management
and will soon add a twelfth staff member.
We believe these improvements merit a careful assessment and evaluation
in terms of program and risk management as directed in the
Appropriations Committee report.
Critiques of Process Overshadow Program Results:
While the draft report mentions the diversification statistics, I am
concerned that its tone and substance fail to recognize what HUD has
accomplished and continues to accomplish. For example, in the section
"Results in Brief' the report states: "While FHA has goals to diversify
the hospital insurance portfolio, and has made some efforts to do so,
it does not have a formal strategy to achieve these goals." In fact,
FHA has made more than "some efforts" toward diversification.
Diversification has been a top program goal for many years, as
evidenced in documents provided to your reviewers. The statistics show
that diversification is occurring steadily. However, the draft report's
emphasis on the absence of a formal written strategy overshadows FHA's
real accomplishments.
Likewise, the draft report criticizes FHA for having performance
measures in its interagency agreement with HHS that are not
quantifiable or that are not measured on a regular basis. While this
critique may be valid, it is allowed to overshadow the success that HUD
and HHS have had in creating a "hand in glove" relationship that is
unusual for two cabinet-level agencies with different priorities and
cultures. The report does state in the section titled "Agencies
Coordinate Key Activities, but FHA Does Not Track Most Performance
Measures" that program participants find coordination between FHA and
HHS to be "generally seamless." However, that observation is missing
from the "Results in Brief' section at the front of the report, which
will be more widely read than the entire document.
A third example in which the report understates FHA's accomplishments
is found in the "Results in Brief' section, which states: "Finally, FHA
has not updated the program handbook, which contains program
eligibility requirements, policies, and procedures, since 1984." This
is true and is a valid criticism. While the eligibility requirements
and policies in the handbook are generally still applicable, the
procedures have changed considerably, and the handbook must be updated.
However, the language in the draft report infers that HUD has not
maintained current policies and procedures, which is not the case. The
handbook is only one of a number of documents that provide program
guidance. In fact, HUD has made continuous efforts to clarify program
requirements and procedures, including updating the Applicant's Guide,
developing the Application Process Checklist, and publishing a
Mortgagee Letter. Establishment of a preliminary review process and
distribution of the "Minimum Criteria for Consideration" have clearly
communicated HUD's eligibility requirements. Further, HUD has
redesigned the program web page to include substantially more
information for lenders and hospitals.
HUD suggests that GAO consider presenting a more balanced view of
program and risk management in the "Results in Brief' section.
Comments on Risk Factors:
In its discussion of potential risks, the draft report discusses a
number of risk factors in the HUD insured portfolio and in the hospital
industry in general. HUD is mindful of the factors that can cause
hospital financial performance to decline, including factors discussed
in the report. However, the Department offers the following comments on
some of the factors that are cited as causes for concern:
* The draft report states: "For instance, the 43 New York hospitals
currently insured through FHA rely heavily upon reimbursement through
Medicare and Medicaid, making them vulnerable to state and federal cuts
in these programs." While true,
the statement implies that New York hospitals are especially vulnerable
to Medicare and Medicaid cuts. In fact, nationwide in 2003, 52 percent
of discharges were attributable to Medicare and Medicaid patients,
slightly more than the 49 percent in New York. Potential cuts in
reimbursement from these programs are a risk factor in all states.
* A second concern expressed in the draft report is that the commission
appointed by the governor of New York to identify hospitals for closure
or restructuring could recommend closure or restructuring of hospitals
in the FHA portfolio, presenting the risk of an insurance claim. While
this scenario is possible, HUD believes it is unlikely because the
commission is required to consider the effect on lenders and
bondholders in making its decisions. Although the commission is charged
with making recommendations to restructure, the governor and
legislature have committed $1 billion of state funds over 4 years to
assist restructuring efforts and improvements to healthcare information
technology. These funds will assist the industry to restructure
including consideration of debt. For a number of reasons, HUD believes
that the State will avoid actions that would precipitate default on a
HUD-insured mortgage that backs State-issued hospital bonds. In fact,
New York State, through its Department of Health and the Dormitory
Authority of the State of New York (DASNY), has a history of helping
its hospitals avoid defaults. [NOTE] Furthermore, the FHA claim rate in
the State, approximately one percent, is half of FHA's claim rate on
hospital loans nationwide.
NOTE: DASNY helps hospitals avoid defaults by providing low or no
interest loans to improve efficiency and fund critical turnaround
plans. DASNY also closely monitors and advises troubled hospitals and
develops short-and long-term business plans. Most notably, along with
HUD and the New York State Department of Health, DASNY helped Saint
Vincent Catholic Medical Centers, Ellis Hospital, and Kingsbrook Jewish
Medical Center avoid defaults.
* HUD shares the concern in the draft report that a large insurance
claim resulting from a default on a large New York mortgage (or for
that matter, a large mortgage in any state) poses a risk to the
program. However, the report might note that the hospital given as an
example (HUD's largest single exposure at $828 million) is a
financially sound, well-endowed institution that poses a low risk of
default.
Comment on Processing Time:
On the issue of processing times for applications, the interpretation
of the data that GAO extracted from the program information system can
be misleading. In the section on FHA's selection process, the draft
report says that it took an average of 265 days to process the 11
applications for hospital mortgage insurance endorsed in fiscal year
2005. Unfortunately, HUD's tracking system does not currently capture
"time outs" in the application review process that occur when the
applicant must deal with issues that were not foreseen at the time the
application was submitted, and which are beyond HUD's control. For
example, the processing of the application for the University of New
Mexico Hospital was delayed for several months after HUD received the
application because the hospital encountered difficulty securing a
lease on Native American land needed for the project. Furthermore,
after beginning the review process of applications for Bucyrus
Community Hospital and the Medical University Hospital Authority, the
scope or cost of these projects were changed by the hospital,
necessitating new feasibility studies. For these three projects, the
delay ranged from approximately 90 days to 255 days.
Hospital projects are complex in nature, and there are many factors
that can delay even a carefully planned project such as those mentioned
above. HUD has strengthened its preliminary review procedures to
require lenders and hospitals to develop solutions to identified
problems before they submit an application. The preliminary review also
increases program efficiency and reduces processing time because it
eliminates from consideration, early in the process, those hospitals
that do not qualify for the program. However, there will still be cases
in which substantive issues arise during the underwriting process that
may take some time to resolve. In the final report, HUD requests that
GAO mention that processing times include suspensions of processing for
matters beyond HUD's control.
Response to Conclusions:
HUD takes strong exception to the sentence: "However, it is difficult
for us, FHA's managers, or the Congress to assess how well the agencies
perform in implementing the program because FHA has not established a
set of meaningful performance measures or collected the information
needed to assess performance." HUD believes that program results
indicate that the program is fulfilling the public purpose for which it
was designed and that it is doing so on a financially self-sustaining
basis. Since program inception, 341 hospital loans have been insured
for a total of $11.9 billion, enabling hospitals in 41 states and
Puerto Rico to obtain affordable financing for construction and
modernization projects. By insuring projects that the private industry
will not insure, Section 242 has enabled the provision of urgently
needed health care services to the medically underserved, and spurred
economic growth in those communities. Furthermore, the results have
been accomplished at no net cost to the taxpayers; in fact, the
hospital program has been a net contributor to the insurance fund. HUD
requests that the "Conclusions" section be modified to present a more
balanced picture that does not allow technical and procedural issues to
overshadow real program accomplishments. More discussion on performance
measures is found below.
Responses to Recommendations:
Recommendation: Establish measurable and objective performance measures
for the hospital program and collect appropriate information to
regularly assess performance against the measures.
Response: HUD agrees on the importance of measurable and objective
performance measures. At a high level, HUD has two performance measures
for the program, both of which are measurable and objective:
1. Geographically diversify the portfolio by expanding program activity
in all regions in order to reduce the risk associated with portfolio
concentration in New York and to provide greater benefit to communities
nationwide.
2. Maintain or reduce the program's historical claim rate of two
percent of the amount of insurance written.
In addition, HUD has tracked two "customer service" performance
measures, achievement of which can help bring about geographic
diversification by making the program more attractive to lenders and
hospitals:
3. Process 75 percent of complete applications within 120 days of
receipt.
4. Process 75 percent of complete loan modification requests within 30
days of receipt.
HUD agrees that the measures for evaluating the performance of HHS
under the interagency agreement are in some cases subjective and not
easily measured, and that in other cases they could be measured, but
are not. Although the performance measures in the interagency agreement
were primarily meant to communicate HUD's expectations to HHS, HUD
recognizes the value of performance measurement in both program
administration and contract (interagency agreement) administration. The
program office will work with HUD's Office of Policy Development and
Research in order to develop the appropriate measures and implement
data collection procedures to evaluate both program and contract
administration.
Recommendation: Update the program handbook to make publicly available
current eligibility requirements, policies, and procedures.
Response: While HUD does not agree that current eligibility
requirements, policies, and procedures are unavailable to the public,
it does recognize the need to consolidate those items in a new
handbook. A new final rule governing the hospital program is being
developed following the public comment period. That rule will provide
the basis for the detailed guidance that will be promulgated in a new
handbook. HUD's goal is to have the handbook in clearance by the end of
calendar year 2006.
Recommendation: Develop a formal strategy to geographically diversify
its portfolio of insured hospitals, including such elements as the
processes, skills, technologies, and various resources that will be
used to reach diversification goals.
Response: Although HUD has pursued a diversification strategy as
discussed above, it agrees that a formal strategy would be useful and
will formalize its strategy.
Recommendation: To potentially improve HUD's estimates of the program's
annual credit subsidy rate, explore the value of explicitly factoring
additional information, such as prepayment penalties and restrictions
and the initial debt service coverage ratio of hospitals as they enter
the program into the credit subsidy model.
Response: HUD welcomes GAO's suggestions that HUD revisit the
calculation of the credit subsidy. In fact, the Department annually
reviews the cash flow models that are used to estimate program
performance and calculate subsidy rates. In addition, these models are
reviewed by the independent auditor of the FHA financial statement and
by OMB. Each year the models are updated for the latest loan
performance statistics and suggestions for methodological improvements
are considered. HUD will include GAO's suggestions in this ongoing
process of attempting to utilize the most sound and accurate modeling
techniques to estimate the cost of its mortgage insurance programs.
With respect to GAO's suggestion that the initial debt service coverage
(DSC) ratio be incorporated as a factor in credit subsidy modeling, HUD
would note that two of the studies cited in the footnotes in the report
as technical support for this suggestion actually found this factor to
be statistically insignificant in predicting commercial mortgage
defaults. In any event, HUD does take into account the contemporaneous
(not initial) DSC ratio in determining which currently insured hospital
mortgages are financially troubled. This contemporaneous DSC ratio
comes from the annual (audited) financial statements submitted by the
hospital owners. It is not clear why HUD should consider using the
initial DSC ratio in addition to-the contemporaneous DSC ratio in
making its artificial default adjustments for the hospital program.
Finally, HUD disagrees with the statement that "FHA estimates that
hospital loans are most likely to experience a claim during their 10th
insured year" and that since the majority of hospital loans are less
than 10 years old, they are only now reaching a period when most claims
occur. There appears to be a misunderstanding, because 70 percent of
the claims and slightly more than 70 percent of the dollar amount of
claims paid occurred prior to the 10th year. The relatively small
population of loans and even smaller number of claims does not provide
a statistically significant basis for predicting claims by loan age.
Conclusion:
HUD has no fundamental disagreements with GAO's suggested improvements
to the Section 242 hospital mortgage insurance program. HUD will pursue
implementation of improvements along the lines suggested. HUD has a
request to make of GAO with respect to the draft report, that positive
program results be given the prominence they deserve. We suggest
revising the "What GAO Found", "Results in Brief", and "Conclusions"
sections of the final report to include this information, and changing
the title of the report, "Program and Risk Management Could Be
Enhanced", to reflect the accomplishments HUD has made since the last
GAO report was completed in 1996.
Technical comments and corrections to the draft report are enclosed. If
you or your staff have any questions, please contact Michael Wells at
202-401-0450.
Sincerely,
Signed by:
Brian D. Montgomery:
Assistant Secretary for Housing - Federal Housing Commissioner:
Enclosure:
[End of section]
Appendix V: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Health Resources and Services Administration:
FEB 9 2006:
TO: David G. Wood:
Director, Financial Markets and Community Investment:
U.S. Government Accountability Office:
FROM: Administrator:
SUBJECT: Government Accountability Office Draft: "Hospital Mortgage
Insurance Program and Risk Management Could be Enhanced"
(Code # GAO-06-316):
HRSA is pleased to comment on the GAO draft report under the terms of
the Interagency Agreement between the Departments of Housing and Urban
Development (HUD) and Health and Human Services (HHS) dated August 9,
2005. Under the agreement, "HUD is responsible for communication with
other Federal agencies and members of Congress" on the hospital
mortgage insurance program. Moreover, while HHS plays an important role
in assisting HUD administer the program, HRSA wishes to speak in unison
with HUD and incorporate HHS' comments with HUD, which is the agency
statutorily responsible for the Program's management. Accordingly, we
have shared our comments with HUD, reviewed HUD's response, and concur
with HUD's observations and recommendations.
We wish to take this opportunity to express our appreciation on the
positive findings of the draft report and are pleased that the GAO
found that "FHA (Federal Housing Administration) and HHS appear to work
together reasonably well in carrying out their respective roles in
administering the program."
We appreciate the opportunity to have participated in this most
important project to HUD and the GAO. Please contact William Tan at 301-
443-5997 if you have any questions or require additional information.
Signed by:
Betty James Duke:
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
David G. Wood (202) 512-8678:
Staff Acknowledgments:
Individuals making key contributions to this report included Alison
Martin, Lisa Moore, David Pittman, Minette Richardson, Paul Schmidt,
and Julie Trinder.
(250239):
FOOTNOTES
[1] 2 U.S.C secs. 661-661f. In this report, we refer to the requirement
of the act as "credit reform."
[2] The results of our study on the nursing home insurance program will
be provided in a separate report.
[3] The Hospital Mortgage Insurance Program supplemented the Hill-
Burton Program. Under Hill-Burton, HHS, formerly the Department of
Health, Education, and Welfare, made loan guarantees and direct loans
to hospitals for construction and modernization projects.
[4] FHA was insuring 74 mortgages for 59 hospitals as of December 2005.
[5] In a cash pay transaction, FHA will pay approximately 90 percent of
the claim within a few days of when the mortgage is assigned to FHA.
The remaining 10 percent is generally paid at a later date, after FHA
has completed its due diligence in processing the claim and the title
passes to FHA. Debentures are financial instruments with 20-year terms
issued by FHA that pay interest semiannually. Interest on the debenture
is used to pay principal and interest on the bonds.
[6] Present value is the worth of the future stream of cash inflows and
outflows, as if they had occurred immediately. Calculating present
value for credit reform requires the utilization of the interest rate
on a marketable zero-coupon Treasury security with the same maturity
from the date of disbursement as the cash flow provides the basis for
converting future amounts into their "money now" equivalents. Net
present value is the present value of estimated future cash inflows
minus the present value of estimated future cash outflows.
[7] A cohort refers to all direct loans and loan guarantees obligated
in a given fiscal year.
[8] This figure is based on the number of days elapsed from the point
that a complete application has been received to the point that HUD
makes a decision to either commit to insuring the project, or rejects
the application.
[9] While FHA requires applicants to provide data showing historical
and projected debt-service coverage ratios, and monitors this ratio for
insured hospitals, it does not explicitly factor the ratio into its
forecast of loan performance when estimating credit subsidies. This
issue is discussed in more detail later in this report in the section
on FHA's credit subsidy model.
[10] FHA's Regulatory Agreement contains covenants, or requirements
that must be adhered to. In addition, FHA can require hospitals to
adhere to supplemental covenants.
[11] This figure does not include financial feasibility study reviews,
which are done as a part of FHA's application review process.
[12] According to FHA, hospitals can also be required to hire
consultants if they fail to meet certain minimum financial ratios,
incur a significant adverse difference between budgeted and actual
performance, or experience significant adverse changes in reimbursement
rates.
[13] The MOA in effect during the period of our review covered fiscal
years 2002 through 2005. A new Interagency Agreement became effective
for fiscal years 2006-2010.
[14] For every hospital that applies to or is insured by the program,
FHA designates an account executive to provide information about the
program, assist the hospital, and monitor the hospital and its market.
[15] Beginning in fiscal year 2006, HHS is responsible for delivering
an annual report to FHA detailing its performance against each of the
measures in the Interagency Agreement.
[16] A loan modification refers to any action a hospital takes that
requires HUD's consent under the terms of the Regulatory Agreement.
[17] GAO, The Results Act: An Evaluator's Guide to Assessing Agency
Annual Performance Plans, GAO/GGD-10.1.20 (Washington, D.C.: April
1998), 14.
[18] GAO, Managing for Results: Enhancing Agency Use of Performance
Information for Management and Decision Making, GAO-05-927 (Washington,
D.C.: Sept. 9, 2005), 7.
[19] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999), 18.
[20] A Certificate of Need is a state-issued designation of the market
need for a hospital.
[21] CAHs, designated by states and HHS, are rural hospitals that, as
of January 2004, may operate up to 25 beds for acute care and receive
cost-based reimbursement from Medicare. CAHs were exempted from the
requirement that no more than 50 percent of the total patient days
during any year are customarily assignable to the categories of:
chronic convalescent and rest, drug and alcoholic, epileptic, mentally
deficient, mental, nervous and mental, or tuberculosis through July 31,
2006.
[22] FHA and HHS staffs compile updates to policies and procedures in
an internal manual available only to FHA and HHS employees. According
to FHA, this document is not meant to replace the Mortgage Insurance
Handbook for Hospitals.
[23] "Fiscal Year 2006 Federal Credit Supplement of the United States
Government; Table 2--Loan Guarantees: Subsidy Rates, Commitments, and
Average Loan Size" (Washington, D.C.: Office of Management and Budget,
February 2005), http://www.gpoaccess.gov/usbudget/fy06/cr_supp.html
(downloaded Oct. 6, 2005).
[24] This figure was calculated for all currently active FHA hospitals
that had loans endorsed from 1996 through 2005.
[25] Financial ratios for active hospitals were compared with FHA
criteria used to determine financial health of program applicants
listed in the underwriting guidelines in the hospital insurance manual.
[26] The 24 applications in development are those that HUD considers to
be in the application pipeline. These include applications that are
still under development and have not yet been received by HUD for
review.
[27] According to Centers for Medicare & Medicaid Services (CMS) data,
of the total patient discharges for insured New York hospitals, 21
percent were reimbursed by Medicaid and 29 percent by Medicare.
[28] GAO, 21ST Century Health Care Challenges: Unsustainable Trends
Necessitate Reforms to Control Spending and Improve Value presented
before the Citizens' Health Care Working Group, Salt Lake City, Utah,
on July 22, 2005, 8.
[29] Medicaid program cuts of $4.8 billion over 5 years are included in
the pending Deficit Reduction Omnibus Reconciliation Act of 2005
(S.1932). Should it be enacted, the act's provisions include increasing
cost-sharing for Medicaid beneficiaries and allowing states to reduce
benefits.
[30] Fitch Ratings, 2005 Non-Profit Hospitals and Health Care Systems
Forecast (New York, NY: Jan. 20, 2005), 8.
[31] Ibid. According to the United States Bureau of the Census, baby
boomers are those people born in the post-World War II period from 1946
through 1964.
[32] The term discharge refers to the formal release of a patient by a
hospital; this includes the termination of a period of hospitalization
by disposition to a nursing home or home care. Medicare discharges
refer to hospital reimbursement through Medicare, and Medicaid
discharges refer to hospital reimbursement through Medicaid.
[33] Fitch Ratings, 2005 Non-Profit Hospitals and Health Care Systems
Forecast (New York, NY: Jan. 20, 2005), 6; Standard & Poors,U.S. Not-
For-Profit Health Care 2005 Median Ratios: Improvement Continues Across
the Rating Spectrum (New York, NY: July 20, 2005), 10; Moody's
Investors Service, Not-For-Profit Healthcare Sector: 2004 Industry
Outlook (New York, NY: January 2004), 9-10.
[34] GAO, Speciality Hospitals: Information on National Market Share,
Physician Ownership, and Patients Served, GAO-03-683R (Washington,
D.C.: Apr. 18, 2003), 6.
[35] Healthcare Financial Management Association, Financing the Future
Report 1: How are Hospitals Financing the Future? Access to Capital in
Health Care Today (Westchester, IL: 2003), 1; Moody's Investors
Service, Not-For-Profit Healthcare: Capital Access: Moody's Answers the
Five Most Frequently Asked Questions on Capital Planning (New York, NY:
September 2004), 1.
[36] Standard and Poor's, New York Health Care: Low Hospital Ratings,
Weak Access to Capital (New York, NY: May 11, 2004), 1.
[37] While hospitals should meet certain criteria in terms of their
debt-coverage ratio and other financial ratios, if the hospital cannot
do so, but can demonstrate that its financial performance has been
improving in recent years, it may still be considered by FHA for
mortgage insurance.
[38] The reserve fund may be used to pay debt service on the mortgage
until the insurance proceeds or debenture payments are received from
FHA. According to FHA guidelines, hospitals may borrow from this fund
with FHA's permission.
[39] When an insured hospital breaks a covenant, FHA requires the
hospital to take corrective action so that the loan is in compliance
with the covenant. For example, a hospital may be required to hire a
consultant to help it identify and resolve the issues that led to its
noncompliance.
[40] According to FHA policy, the following circumstances should be
used as flags to trigger closer evaluation of a hospital's financial
status: a missed principal or interest payment; significant losses from
adverse revenue or expense trends over time, or a major one-time loss;
poor liquidity; and a negative cash flow over debt service
requirements.
[41] Three hundred forty-one loans have been insured over the life of
the program, as of Dec. 31, 2005.
[42] While the term "default" refers to the status of a loan when a
mortgage payment is late and "claim" refers to the filing of a claim
for insurance, HUD uses the term "artificial default methodology" to
refer to its methodology for increasing the number of expected claims
for insurance.
[43] Inclusion on the priority watch list is based in part on financial
criteria, including a current debt service coverage ratio of less than
1.10. This criterion serves as a flag but is not a determinant for
inclusion on the priority watch list.
[44] Jesse M. Abraham and H. Scott Theobald, "A Simple Prepayment Model
of Commercial Mortgages," Journal of Housing Economics, vol. 6, no. 1
(1997); Austin Kelly, V. Carlos Slawson, Jr., "Time-Varying Mortgage
Prepayment Penalties," Journal of Real Estate Finance and Economics,
vol. 23, no. 2 (2001); Qiang Fu, Michael LaCour-Little, and Kerry D.
Vandell, "Commercial Mortgage Prepayments Under Heterogeneous
Prepayment Penalty Structures," The Journal of Real Estate Research
vol. 25, no. 3 (2003).
[45] The regulations also state that prepayment restrictions and
penalty charges must be acceptable to the FHA Commissioner.
[46] We analyzed projected debt-service coverage ratios from the
underwriting reports of 13 hospitals that applied for mortgage
insurance between 2002 and 2005.
[47] Brian A. Ciochetti, Yongheng Deng, Bin Gao, and Rui Yao, "The
Termination of Commercial Mortgage Contracts Through Prepayment and
Default: A Proportional Hazard Approach with Competing Risks," Real
Estate Economics; vol. 30, no. 4 (2002); Kerry D. Vandell, Walter
Barnes, David Hartzell, Dennis Kraft, and William Wendt, "Commercial
Mortgage Defaults: Proportional Hazards Estimation Using Individual
Loan Histories," Journal of the American Real Estate and Urban
Economics Association, vol. 21, no. 4 (1993).
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[49] The Association of Financial Guaranty Insurers is the trade
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[51] For the years 1992 and 1993, the credit subsidy rate for the
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