Proton Beams Zap Cancer With Muni-Bonds as Market Strains

(Bloomberg) -- Hospitals and health-care centers borrowed more in the municipal-bond market last year for cancer treatment facilities known as proton clinics than they did over the previous decade after private lenders balked following a string of financial failures brought about by the industry’s aggressive expansion.

Local government agencies -- which sometimes lend tax-exempt bond proceeds to businesses -- issued $418 million of debt last year for such clinics, up from the $239 million in the prior 10 years, according to data compiled by Bloomberg. The surge is helping to bring new clinics on line, with 18 set to finish construction by 2021, according to the National Association for Proton Therapy. None of the bonds sold last year carried credit ratings, a step that borrowers take to avoid the potential stigma of being labeled junk.

The rapid expansion has concerned some analysts and health-care experts, who say the market for such clinics is already near saturation and wider expansion of proton treatment overextends the clinical use of the technology. Debt sold by rural hospitals and other types of medical clinics are one of the biggest sources of defaults in the municipal market, a haven for individual investors seeking steady, tax-exempt returns.

"We’ve put this little bomb inside the muni bond market, which could go off as soon as the payments become due," said Amitabh Chandra, director of health policy research at Harvard’s Kennedy School of Government. "I think investors are going to be caught asleep at the wheel."

Proton therapy is an evolution of radiation treatment that’s been in use since 1990, and it quickly moved from clinical trials to treating patients. However, the cost to build a clinic --almost a quarter of a billion dollars in some cases -- dwarfs that of existing technologies, such as $3 million to $4 million for a photon linear accelerator, the previous radiation standard.

’Staggeringly Expensive’

"I know that a lot of health systems have needs for a proton therapy center and they are staggeringly expensive," said Justin Cooper, co-chair of public finance for Orrick Herrington & Sutcliffe, the nation’s largest municipal-bond law firm. "People are trying to work out ways to take advantage of the municipal bond market -- the favorable interest rates, tax-exemption and length of debt that you can get."

Early proton clinics usually were built around three to five treatment rooms and cost between $125 million and $225 million each -- enough to fund a 100-room hospital at the time, said Scott Warwick, executive director of The National Association for Proton Therapy. That made it tough for many health systems to justify.

"It was too much for a health system to venture out with a small technology that, in the grand scheme of a hospital, is a small part of an overall health system," Warwick said.

In the mid-2000s, for-profit companies, such as the San Diego-based Advanced Particle Therapy began opening multiple facilities across the country. Based off of surrounding population data and approximate new cancer diagnosis projections, these clinics predicted they would treat about 1,500 to 2,000 patients annually. They didn’t come close.

Advanced Particle Therapy’s first center, in San Diego, treated 1,400 patients in its first three years -- below projections -- and was forced to file for bankruptcy in 2017. The five-room, privately financed $220 million facility, which was powered by a 90-ton cyclotron, "had not operated on a profitable or even a break-even basis," according to court documents.

"The proton therapy health-care industry is not any different from other types of businesses," Warwick said. "You have folks that want to enter the field that have more aggressive models. Sometimes it works, sometimes it doesn’t."

Advanced Particle Therapy also had begun work on three other centers, though only one, in Maryland, ended up completed. Planned facilities in Dallas and Atlanta both went bankrupt during construction. In Atlanta, the nonprofit Provident Resources Group Inc. agreed to take over, issuing $219 million in unrated municipal bonds in 2017 to finish construction.

Steve Hicks, chief executive officer of Provident Resources, said Atlanta is an untapped market with plenty of demand to support his center. Georgia is also a certificate-of-need state, meaning any other new facility would need government approval to open nearby, monopolizing coverage.

"We are not concerned about a project over in Birmingham or a project starting up in Charlotte," Hicks said. "We know our primary service area and this center will be located in such a densely populated area, which will certainly make proton therapy more available to a lot more people."

Bloated Model

Prakash Ramani, a managing director of public finance at Loop Capital Markets, said the reason some facilities failed was because their model for predicting patient demand underestimated the importance of physician referrals, which is the largest factor in patients choosing proton therapy over cheaper, insurance-covered photon radiation treatment.

"They were all built around an excel spreadsheet," Ramani said, "but they didn’t look at the underlying factors of health-care -- that treatment numbers are more related to patient referrals from physicians."

In the past, some bond deals for proton centers did not come with a guarantee by a rated health system to secure the debt. They were backed solely by revenues of the proton center, putting bondholders at greater risk.

Now that’s changing. Borrowers, such as the University of Miami, are including their general revenue pledge to fund the construction and development of the proton therapy center. The Miami-Dade County Educational Facilities Authority is selling $241 million of bonds next week for the University, with $40 million for a proton center that is expected to open in 2020.

Given the growing number of clinics, which intensifies regional competition, patient demand has become even more critical to proton facility success. To mitigate that risk, new facilities are shrinking in size to one or two room clinics.

Loop Capital private placed two separate $81 million municipal deals in 2017 for upcoming one-room clinics in Birmingham, Alabama and Delray, Florida. Both are expected to begin treating patients in 2019, according to bond documents. Having only one treatment bay keeps the cost down of construction and lessens the need for higher patient demand.

"It allows hospital CEOs to not have to go all-in," Warwick said. "Centers are being more strategic, and they believe they need to offer proton therapy treatment to their patients because of the benefits of it, but they’re trying to do it in a way that’s a little more fiscally conductive for their system."

©2018 Bloomberg L.P.

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