Obstacle Course

REVIEW SUMMARY
Company: Park Royal Psychiatric Hospital
Industry: Health care
Key: Regulatory hurdles and financing challenge health care investors.
By the numbers: Click here to review Park Royal Psychiatric Hospital's projected revenues.

Health care may be one of the few bright spots in Florida's struggling economy, but try building a new hospital.

Jim Harper, 60, has built and operated five psychiatric hospitals in his career and now plans to build a sixth in Lee County called Park Royal.

“I thought this was going to be the easiest one,” says Harper, Park Royal's CEO.

But obstacles threatened to halt the project, including a regulatory approval process in which a well-funded competitor stymied the deal. Changes rocking the healthcare industry, the banking crisis and souring investor sentiment in the municipal-bond market also threatened to stall or halt plans for the new hospital.

After five years of discussions, planning and litigation, construction of the 76-bed hospital is scheduled to begin within weeks and open in February 2012.

But the fact that it took so long to put the Park Royal deal together will give pause to other investors in the sector. Even if there's a clear need for a hospital, who would want to build one under these circumstances?

“This is the most difficult environment I've ever operated in,” says Rogers Wells Jr., chairman of Park Royal, an entrepreneur who has built 26 companies and served as Kentucky's secretary of finance from 1987 to 1991. Wells, 73, lives in Naples and is the lead investor in the hospital venture.

Wells says if he had known how difficult it would be to build a new hospital he probably wouldn't have invested in the venture. “You can't see all the obstacles in front of you,” he says. “It's too bad because we're faced with so many people needing jobs.”

Still, that hasn't dampened Wells' enthusiasm for this hospital project or other investments in health care. He's a hands-on investor, recently reviewing plans for the hospital with the architects. “I feel like health care has as much or more potential than anything else,” he says.

The flip side of these challenges in getting the necessary approvals and financing is that it is highly unlikely that another competitor will try to enter the market even as financial projections filed in a bond prospectus show the hospital turning a profit in its second year and revenues growing at 20% to 30% per year through 2015.

Strong demand, little supply

Based on population alone, Park Royal appeared to be a great opportunity for lenders and investors.

Lee County is the largest county without a stand-alone psychiatric hospital because two such facilities closed years ago. For this kind of care, any of the nearly 600,000 residents must drive north to Charlotte County or south to Collier County.

What's more, Lee Memorial Health System encouraged Harper and his business partner Dan Page to build the hospital on its Health Park Medical Center campus. Harper says discussions with Lee Memorial, the dominant hospital operator in Lee County, began in 2005 when Page was on vacation in the area. Page was a founder of Greenleaf Health System, which developed and operated a chain of psychiatric hospitals in Arkansas, Georgia, Oklahoma and Texas.

At the time, Lee Mental Health, a nonprofit organization that operates a non-residential, 30-bed facility that treats patients in crisis, had obtained approval from the state to build a psychiatric hospital but had allowed it to lapse because it couldn't raise the necessary funds.

Meanwhile, by 2006, Lee Memorial was deep in discussions about acquiring HCA's competing hospital in Fort Myers and didn't have the resources to build its own psychiatric hospital, Harper says.

After community forums indicated a strong need for a psychiatric hospital, Lee Memorial contracted with Harper and Page to lease a wing of the hospital at Health Park for 15 psychiatric beds, which opened in February 2009.

“This was not a business that we saw as a part of our role in the community,” says Sally Jackson, Lee Memorial's director of community projects, explaining why the system didn't build a psychiatric hospital itself. “We, as a health system, cannot do it all.”

But success was immediate. Since it opened the psychiatric wing in early 2009, the facility has treated 700 patients and nearly every bed is full most of the time.

Statewide, hospitals are building psychiatric wings and hospitals because of better and more predictable insurance reimbursements resulting from recent federal legislation. In 2005, Medicare, the government's insurance program for older people, changed its reimbursement system for psychiatric care to a simple per-diem rate from a complex formula. And in 2008, a new “parity” law mandated that psychiatric care should be reimbursed on an equal footing with primary care.

Certificate of need

To determine whether a region needs new services, every new hospital project in Florida must be reviewed by the Florida Agency for Health Care Administration. The rationale behind such “certificate of need” is to ensure quality care and prevent duplication.

Park Royal applied for the certificate of need in September 2008 and quickly received approval in December 2008. But competing hospitals can appeal the decision, which is what Health Management Associates did in January 2009.

HMA, the Naples-based hospital company, operates Riverside Behavioral Health, a 52-bed psychiatric facility in Punta Gorda, across the street from Charlotte Regional Medical Center, a 208-bed hospital it also operates. (HMA officials could not be reached.)

HMA is one of the Gulf Coast's biggest companies. It operates 59 hospitals and generated more than $5 billion in revenues in 2010. A new psychiatric hospital in Fort Myers would likely draw patients away from its Punta Gorda facility, they reasoned in court documents.

Harper remembers entering the Tallahassee courtroom of the Florida Division of Administrative Hearings on the first day of HMA's appeal and seeing seven rows of benches filled with HMA documents to be presented in court. The tactic didn't intimidate Harper or Wells, but they ended up spending $1 million in legal fees in the appeal.

Lee Memorial's Jackson was there too. “I've never seen so many documents in one room,” she says.

“They could have appealed it until we'd run out of money,” Wells says. But by then, Wells says he and his partners had spent so much time and money that turning back wasn't an option. “You're halfway across the river; what do you do?”

Wells credits state Sen. Michael Bennett, R-Bradenton, for helping lobbying HMA on Park Royal's behalf. “He's been very, very helpful to the project,” Wells says.

After nearly 10 months of appeal, Administrative Law Judge J.D. Parrish ruled in October 2009 in Park Royal's favor. “There is no market share monopoly in health care,” Parrish wrote in his order.

Bond markets in turmoil

Once the litigation was over, borrowing money would be the next challenge. Despite the fact that the certificate-of-need process creates an economic moat that discourages competitors, the banking industry was in no position to finance a new hospital.

So executives with Park Royal turned to the Lee County Industrial Development Authority, which has the power to issue tax-free bonds. In this case, it used a portion of the federal economic recovery zone bonds allotted to Lee County. Still, the process was lengthy because it required approval by the Lee County Commission.

Bond underwriter Oppenheimer was scheduled to help sell $23 million of these bonds to investors in the last weeks of December. That's when analyst comments about the potential default of certain municipalities spooked investors in the closing weeks of 2010.

The outcome of the delay was that Park Royal had to offer higher yields to attract investors, resulting in an added $400,000 in annual interest costs. And hospital executives considered themselves fortunate because many municipalities canceled their bond offerings because of the lack of investor interest.

When you add the cost of the litigation to the time and effort to obtain financing, Harper estimates he and his partners will have spent $5 million, bringing the total to $28 million counting the bond investors.

“It's the most expensive psychiatric hospital in 2011,” Harper says.