Is Healthcare Really Recession Proof?
Whomever said healthcare is recession proof, perhaps did not consider what kind of havoc a pandemic could wreak on our healthcare system. Every sector of healthcare was impacted. Elective surgeries were postponed, greatly impacting hospital and surgery center revenue, supply chains were disrupted, nursing home census dramatically declined and home health initially took a hit, but started to rebound as patients felt safer receiving care in their homes. Other sectors, such as telehealth, are having their heyday in the spotlight. Health Affairs published an article late last year suggesting that 2020 will likely be the first year ever that shows an annual decline in overall healthcare spend since CMS (Center for Medicare and Medicaid Services) began tracking spending in 1960. April 2020 was the largest decline when healthcare spending was down just over 20 percent. However, healthcare spend has been gradually recovering since then.

Stimulus to the Rescue
The CARES Act and The American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Packages, among other packages and executive orders, represented a $5 trillion pandemic relief tab for our nation. In addition to PPP and the Payroll tax deferral programs, healthcare providers received additional aid in the form of other programs specific to healthcare providers, which included:

• AAPP – Accelerated and Advance Payment Program
• HHS (Health and Human Services) Grants
• Medicaid rate increases

CMS announced that they paid more than 22,000 Part A providers, $98 billion in accelerated payments and to Part B providers, $8.5 billion. The AAPP Medicare loan program will need to be repaid, putting pressure on already distressed healthcare providers. Recoupment of Medicare remits starts at 25 percent of Medicare payments for the first 11 months and then increases to 50 percent for another six months. If the liability is not repaid after that time, CMS converts the amount owed to an extended repayment schedule, upon request, at an interest rate of 4 percent.

HHS provided both general and targeted distributions, in the form of grants, to healthcare providers to aid in financial relief through the Provider Relief Fund. The grants represented $178 billion in payments according to HHS. Recipients of relief funds must comply with reporting requirements to receive forgiveness. CMS has extended the deadline for reporting, but providers are required to continue to track the appropriate use of the payments to CMS to grant forgiveness, which, if not expensed correctly, could result in repayments owed back to the government.

Medicaid rate increases were dished out by many states in the form of rate increases ranging from $5 to $40 in additional reimbursement per resident, per day. Other states provided relief by temporarily increasing wages for direct care workers or those with COVID-positive residents. The National Governors Association reported 23 states provided additional payments to nursing facilities and 10 states increased staff payments. Skilled Nursing Facilities that dedicated entire facilities or wings to caring for COVID patients received additional per diem incentive.
After receipt of all this borrower stimulus money, how are healthcare lenders faring through the pandemic?

Liquidity in the Year of COVID
Much of the healthcare-focused stimulus programs were spread throughout the latter half of 2020, leaving many healthcare lenders feeling the brunt of paid down loans and borrowers with improved liquidity towards the end of the year. Much of this liquidity remains, especially in the nursing home sector and in certain geographic regions. A study by Georgia Tech Scheller College of Business, published in March of 2021, looked at the relationship between cash flow, capital and COVID as it relates to nursing home finances. A finding of the study indicated, “less financially stable firms who could not invest in significant risk mitigation efforts were more adversely affected than financially stable firms who heavily invested in risk mitigation efforts.” Drawing the conclusion that liquidity and the ability to manage a crisis plays a significant role in where Skilled Nursing Facilities stand after the COVID pandemic, leading to the outcome the industry is experiencing now with consolidation and acquisition transactions leading to lending activity.

Liquidity in hospitals is playing out in a similar fashion. Fierce Healthcare reported, “Greater liquidity, a stable payer mix and higher-acuity patients helped major hospital chains end 2020 with massive profits despite a financial roller coaster caused by the pandemic.” Though this is true for larger systems, smaller facilities in rural settings have not been as fortunate. Narrow profit margins, pre-COVID, have intensified the challenges that COVID brought, leading to a renewed interest in hospital mergers and acquisitions and an opportunity for lending within the hospital sector.

Opportunities Abound
The healthcare market is primed for continued rebound after COVID, as the industry is now starting to experience an increase in healthcare employment, hospital visits, Ambulatory Surgery Center volume and SNF census starting to increase again, albeit slowly. Historically low interest rates combined with investor interest in the healthcare sector continue to make lending into this space an interesting opportunity.

M&A activity and a newer and emerging trend of SPAC (Special Purpose Acquisition Company) formation could both contribute significantly to the sector. SPACs, especially, seem to be piquing the interest of healthcare investors, with the end goal of taking a private company public through an expedited IPO-like process. However, blank check companies, as they are referred to, are increasingly garnering government regulatory attention.

Consolidation in the healthcare industry continues to be a trend for 2021 and will likely present the need for new financing opportunities. Consultants, advisors and lenders are hoping for the big push, by banks, to exit credits for covenant and other defaults related to the pandemic, that can only be waived for so many quarters. Small signs of those conversations have begun but have not resumed full speed ahead. As the excess liquidity starts to run dry, we should see more of those opportunities surface.