Rural Michigan hospital gets state lifeline as it awaits federal designation change

Michigan’s new budget package provides an $11 million lifeline that will stave off the looming closure of Sturgis Hospital as it works on a long-term fix for its weakened fiscal health that left the city on the hook to cover a recent lease payment related to debt service.

The City of Sturgis Building Authority in 2014 refunded bonds sold in 2004 and 2005 that financed upgrades for the small facility that is the city’s only hospital and emergency room. The bonds are secured by a full faith and credit general obligation lease contract that requires the city make lease payments to the authority to repay the bonds.  

The city, in turn, entered into a sublease in late 2009 with Sturgis Hospital Inc., a not-for-profit, leasing the facility in exchange for rental payments that go to cover the city’s lease payments needed to repay the bonds. The hospital previously was a unit of the city.

The hospital was late making its latest lease payment to the city but the city made good on covering its payment to the authority, according to a May disclosure on the Municipal Securities Rulemaking Board’s EMMA website. The bonds carry insurance from Build America Mutual Assurance Co. and have an A-plus underlying rating from S&P Global Ratings.

The missed rental payment was just one symptom of the hospital’s looming insolvency.

“The city received a notice of facility closing on June 20, 2022 from the hospital informing the city that, unless circumstances change, the hospital anticipates that it will permanently close all facilities and services effective on or around July 23, 2022,” a July 14th update reads.

The hospital, located in south central Michigan just across the Indiana border, had notified the state that it was “actively seeking capital, business combinations with other healthcare companies/investment groups, and other sources of funding to avoid a shutdown.”

To stave off closure, the city earlier this month signed off on emergency funding in the form of a $645,000 loan using a portion of its share of federal COVID-19 relief in the American Rescue Plan Act contingent upon state approval of a bridge funding grant. 

“As part of the overall budget for the state of Michigan, on July 1, 2022, the Michigan Legislature approved the grant in the amount of $11 million to the Hospital,” the July 14 notice reads. “The budget is currently awaiting signature” of Gov. Gretchen Whitmer. The appropriation was included in an amended fiscal 2022 budget that was part of the larger fiscal 2023 budget deal.

The hospital will use the grant to repay the city loan and to cover the next two rental payments coming due. A longer-term fix is in the works as the hospital “is in the process of converting to a rural emergency hospital designation in 2023 when the new federal law takes effect,” according to the notice.

Hospital officials have said the funding will help cover $500,000 in monthly losses and help pay for various projects.  

Sturgis’ fiscal woes highlight the long-standing struggles of independent and rural hospitals many of which were losing money before the COVID-19 pandemic struck.Those wounds worsened as they lacked the benefits of operating within a larger system that could more easily manage the pandemic’s effects along with ongoing supply chain, inflationary and staffing pressures.

Sturgis officials have attributed some of their operating struggles to rising costs and weaker federal reimbursement rates prior to the pandemic while federal relief early in the pandemic helped it and others like it stay afloat.

The hospital is banking on increased federal reimbursement funds next year when the new Rural Emergency Hospital designation for eligible Medicare providers takes effect. Congress passed the new designation in December 2020 in the Consolidated Appropriations Act of 2021.

The hospital is in the process of seeking approval from the federal Centers for Medicare and Medicaid Services for the designation that could help make the hospital more appealing for potential buyers to step up.

The new designation was the federal government’s answer to help “address the growing concern over closures of rural hospitals. The REH designation provides an opportunity for Critical Access Hospitals (CAHs) and certain rural hospitals to avert potential closure and continue to provide essential services for the communities they serve,” according to federal documents.

Since 2010, 140 rural hospitals have closed, according to the North Carolina Rural Health Research Program. The Chartis Group warns that 25% of the remaining more than 400 rural hospitals are at risk of closure as they grapple with aging populations and less affluent payors.