What we know of today as modern outpatient healthcare services had its underpinnings more than 40 years ago. Like all business trends, the outpatient healthcare business sector has had its ups and downs. Recently, however, the sector has had more “downs’ than “ups,” often resulting in highly stressed centers. Highly stressed centers are owned and managed by people who are not necessarily used to the pressures that come with centers that are faltering or failing. What can you do as a lender to support your stressed borrower, but at the same time protect the integrity of your portfolio? Before I begin to address that question, I want to provide some background to the “ups” and “downs”.
The biggest “up” is when Medicare (and other third party payers) approved reimbursement for various outpatient-based diagnostic and treatment services. The result was the commercialization of certain technologies (MRI, Cat Scan, PET, etc.) and certain service venues such as diagnostic imaging centers, ambulatory surgery centers and radiation therapy centers. There are now thousands of them throughout the United States and many have done quite well. Now for two key examples of “downs”.
Back in the late 1980’s a series of regulations were adopted over a period of time by the Federal Government known as “The Stark Legislation” that banned referring physicians from having ownership interests in healthcare service businesses to which they had the ability to refer patients or the ability to influence the referral of patients. The legislation was based on studies that showed over-ordering and over-utilization when financial incentives were present. In this decade, another piece of landmark legislation, known as The Deficit Reduction Act of 2005 (“DRA”), went into effect (January 2007). It reduced Medicare reimbursement by as much as 40% or even 50% for outpatient diagnostic imaging services.
The Borrower’s Side
The message I give to borrowers is to be open and upfront with their lender, especially if they have a problem. Sooner or later, the lender is going to find out and the borrower better be the one who tells them. If the borrower is not, the lender will likely be very mistrusting of the borrower and that will not be good for anyone. I tell them that their lender can be their best ally, including helping the borrower engineer a turnaround of the center. If the borrower thinks they can resolve their own problem without involving or alerting the lender and then does it – great. If that cannot be done, then the borrower should tell the lender what is going on, share the issues, share the plans and seek their assistance and advice.
The Lender’s Side
For the lender, I tell them that they need to promote an atmosphere of trust and openness with their borrowers – and they need to have a highly developed early warning system of when a borrower is in trouble. Finding out that a center is in trouble because they are late with payments or because there are missed payments is obvious and fine, but it may be too late to help. Obtaining quarterly reports regarding cash flow, patient volumes, referral sources and the like can keep you more in tune with what is occurring with each borrower. A well-defined follow-up and early warning system that looks at routine, but telling information is what every lender needs to have. Once the lender knows there is a problem, options including the engagement of outside consultants can be made available to the borrower.
Here are some examples of options for lenders: adjust repayment schedules, provide skip or lower payments for a period of time, loan the borrower more working capital, have your own work-out staff spend time understanding what the borrower’s turnaround plan is, engage a consultant, as noted, to do an assessment of your behalf, or do nothing. Doing nothing might be the right final option, but without understanding what the issues are, what possible solutions might exist and what the borrower is willing to do to make the center work again so your repayments can begin again, is a big mistake. Some lenders engage their credit staff to handle this and some their sales or sales management staff – that is better than doing nothing. However, those activities will take away from the primary mission of generating new business. Make sure you as a lender have a plan of your own for dealing with poorly performing assets, whether that involves in-house staff, outside consultants or a combination of the two.
Elements of a Center’s Turnaround
Centers that have experienced difficulties in the past have done several things to “right the ship”. They have included cutting costs, increasing marketing and sales efforts, renegotiating third party payer contracts, bringing in new investors as value-add partners (physicians and hospitals), making capital calls, merging with other entities and even selling themselves, entirely or in part. Other options and combinations of options exist and are all situation-dependent. Knowing the people managing your borrower and having an open relationship with them will help you, as a lender, stay ahead of the curve and minimize your losses.
Final Word
The healthcare industry is about to embark on a major change and that change will cause stress on the system, stress on the people involved in the system and, therefore, stress on lenders. Being prepared with a pro-active turnaround strategy for your portfolio is a critical element for your survival.