ABL Advisor: Traditionally, general practitioners served common patient needs. Today, these needs are being met by Retail Clinics (CVS, Rite Aid, etc.). Are you seeing (or expecting to see) financial stress among larger independent physician practices resulting from the growth of these Retail Clinics? What do you foresee occurring in this portion of the healthcare sector?

Maroney & Schmitt: The growth of these retail clinics is another reason why independently employed physicians continue to align themselves and their practices with hospitals and health systems. It is increasingly difficult to remain profitable when patients have the ability to seek common care at the pharmacy around the corner.

By 2018 it is anticipated that there will be more than 2,800 retail clinics around the country (Accenture). This is because retail clinics are more accessible and offer a greater financial incentive compared to care provided in a traditional hospital setting. The rise of high-deductible plans has driven consumers to seek lower cost, flat rate care from clinic settings. These alternatives are often closer geographically, have extended hours, and may even be staffed by the same personnel that a patient would see at a doctor’s office.

Many traditional clinics now offer alternatives, sometimes via telemedicine in an effort to compete. However, structural challenges will make it difficult for most traditional service providers to deliver care as conveniently as retail clinics. 

While the retail clinic certainly puts pressure on the traditional healthcare system, it can’t replace the offerings from a legacy provider such as a hospital. We expect clinic offerings to continue to expand and for legacy hospitals to create clinics and/or partner with retail clinics as an extension of healthcare delivery, interconnected with hospital data and e-records.

ABL Advisor: With a clean sweep in Washington D.C. by the Republican Party, there is talk of either repealing or significantly changing many provisions of the ACA.  Do you see this uncertainty creating additional stress within the sector over the next 12-18 months? Please explain.

Maroney & Schmitt: Uncertainty will continue to have an impact on the industry, especially since many healthcare providers had already delayed investments and capital expenditures in the 12 months leading up to the election. This delay will likely continue at least until the industry sees what changes will be made to insurance coverage and Medicaid/Medicare reimbursements.

Questions about reimbursements, incentives, and the insured pool will likely continue to suppress investment in complex equipment and facilities. This flies in the face of an industry that demands innovation to improve the standard of care.

Take investments in medical equipment, for example. The average life of medical equipment is relatively short, approximately five to seven years. This lifespan has lengthened in recent years as providers have delayed purchasing decisions to stretch equipment further, especially since deinstallation and removal of existing equipment and installation of new equipment is so costly. Although values have been holding steady, this reduction in transactional activity may signal a decline in future equipment values.

In addition, consumer reactions to high-deductible plans are creating further uncertainty for hospitals in projecting patient volume and revenue.

Our view is that a complete overhaul of the ACA is unlikely. The ACA is a primary reason why hospitals have been seeing higher volumes of insured patients. If the law is repealed or replaced, those volumes would drop significantly and adversely impact payments. The impact on providers would be significant, to say the least.

Regardless of the direction from Washington D.C., health providers will continue to face pressure resulting from continued consolidation. The need for creative solutions to ensure survival will remain.

ABL Advisor: What alternatives should healthcare providers consider to help survive the uncertainty?

Maroney & Schmitt: The first thing we would tell providers to do is take a step back. Is their business plan clear? Are their core services supported? Does their business model support growth and sustainable margins? If the answer to any of these questions is no, providers should consider paring back on non-core assets. They should take a long, hard look at facilities and equipment and consider whether there is an opportunity to dispose of investments, non-strategic facilities and expansions that don’t support or further their cause.

Providers might also consider taking advantage of an asset-based lending facility, particularly given the fact that hospitals are asset intensive and typically have major investments in machinery and equipment. The number of financial institutions that have opened or expanded healthcare lending practices is one indicator of where the industry may be headed.

ABL Advisor: What major financial stress indicators should lenders be monitoring from Gordon Brothers’ perspective when lending within the healthcare sector?

Maroney & Schmitt: Lenders should examine the composition and trends associated with the institution’s reimbursement streams, as well as the nature of its “bad debt”—uncollected revenue (e.g., uncollectable pledges from donors) and if its levels of “uncompensated care” exceed or are beginning to exceed state regulations.

Lenders should also pay attention to the number of industry bankruptcies (as well as the cause of distress), reported cash flows from major hospitals and clinics, reports from major manufacturers and industry associations on reinvestments in equipment, as well as hospital facility expansion.

Of course, lenders will be closely watching the new administration’s approach to policy-making and regulatory matters, such as price controls.  For example, over the past few years the prices on generic pharmaceuticals has decreased – as have the margins for several companies we appraise. This may be driven in part by the increased negative publicity on the price of drugs, as well as fear from the industry that the government will mandate price controls.

Our team expects 2017 will bring an increase in lending against unique use and esoteric healthcare collateral, including specialized real estate, specialized equipment, and fluid and solid state inventories that are used in surgery or treatment.