Educational Insight into Proton Therapy Center Financing
Proton therapy is a form of radiation treatment that disrupts and destroys tumor cells using precisely delivered energy. In comparison to traditional radiation treatment, proton therapy allows doctors to have better control where the energy is released, therefore impacting less healthy tissue and causing potentially fewer side effects.
The first hospital-based proton therapy center was established in 1990 at the Loma Linda University Medical Center in California, and there are currently 42 operating proton therapy centers in the United States. However, the closest facilities to Connecticut are the New York Proton Center in New York, NY and the Northeast Proton Therapy Center at Mass General Hospital in Boston, MA.
Proton therapy centers require complex construction and equipment, and many healthcare organizations partner with an experienced developer to manage the construction and operation. The developer is responsible for designing, developing, and equipping of the center, as well as managing and supervising the day-to-day operations of the center upon completion of development. The manager will also be responsible for billing and collecting both professional and technical fees related to the proton therapy services provided at the center. The costs to construct these centers can vary from $50 million to over $300 million, depending on the number of gantries (the equipment that delivers the treatment to the patient). A single gantry can cost up to $30 million. As a result, organizations have sought out unique ways to finance the construction of these centers, including the issuance of tax-exempt debt.
Due to the partnerships between healthcare organizations and developers, tax-exempt bond issuances must be structured in a way that’s different than bonds historically issued by the Authority. The borrower in these transactions is typically a limited liability company, and the member(s) of the borrower are tax-exempt organizations or a disregarded entity of the tax-exempt organizations. The borrower itself is viewed as start-up company, where its only asset is the center, and its revenues are only those derived from the operation of the center. Moreover, the tax-exempt bonds for these proton therapy centers typically are fixed rate, have a 30-year amortization, and are structured with senior and subordinate obligations. Security for the bonds include a pledge of gross operating revenues of the center, with the senior obligations also secured by a Debt Service Reserve Fund and Liquidity Support Fund. The bonds are sold only to qualified institutional buyers in denominations of $100,000 or any integral multiple of $5,000 in excess thereof.
The risks with these transactions are considerably high. At least ten proton therapy centers in the U.S. have been financed through the issuance of tax-exempt debt. The primary risk that can lead to default is insufficient patient revenue. There are a number of risk factors that can impact patient revenue which include, but are not limited to: delays in construction of the center, inability to successfully operate the center, including inability to maintain the operation of the equipment, a weak referral or patient base and changes to reimbursement rates. These risks result in higher bond yields and as a result, borrowers are faced with debt service costs considerably higher in comparison to other healthcare related tax-exempt obligations. For bonds sold prior to 2022, coupon rates ranged from 5.50% to 8.625% and in most cases priced at 100.00.
