One would be hard pressed to imagine a day in recent times during which some aspect of the passage and implementation of the Affordable Care Act hasn’t dominated the headlines. To be sure, the Act has been at the center of political discord, the recent government shutdown, and a myriad of assertions, counter-assertions and contentious discourse from Capitol Hill to living rooms across the country. As of this writing, the implementation is mired by technical glitches that have spawned Congressional hearings to both determine the source of the troubles as well as to serve as an arena to further press political agendas.
With Washington being Washington, the debate over the Act is certain to continue for years to come. But, we wondered, what of the Act’s impact on the healthcare finance sector? ABL Advisor thought it time to set the politics aside and seek the view of a professional in the healthcare space. As such, we spoke with Steve Curwin, Chief Credit and Risk Officer of MidCap Financial to first ascertain his view of the general health of the healthcare finance sector and the implications, if any, of the passage of the Act to the way lenders in the space will need to conduct business going forward.
It’s interesting to note that MidCap Financial launched in September of 2008, a time when the headlines were still apocalyptic, but were focused on the failure of Lehman Brothers, Bear Stearns and the like. While the timing was perhaps not optimal in the financial services sector, the MidCap team pushed forward with the venture in the face of grim predictions and a great deal of uncertainty. Today, Curwin remains bullish on the sector and is unfazed by the dire prognostications of the Act’s detractors.
As for the state of sector, Curwin states, “We think the market is very healthy considering that since we launched this business, the country has been in the midst of various economic crises accompanied by a great deal of political dysfunction. Through it all, reimbursement has actually remained stable, which is very important for the various parts of our business … particularly on the asset-based lending side. But in terms of the healthcare industry, it is remarkably stable considering all of the stress that’s been put on the economy.”
While the passage of the Act has been acrimonious and the implementation fraught with glitches, it’s clear by now that this piece of legislation is here to stay. We asked Curwin to share his view of whether or not the Act’s implementation will have any effect -- either in a positive or negative way -- on the healthcare finance sector. He says, “With 20 million to 30 million more people eventually either becoming insured or participating in the expanded Medicaid program, I think that overall this is going to have a positive effect. With at least half of the states opting into the Medicaid expansion coupled with many more lives covered by insurance, hospitals will be providing far less unreimbursed care in the future.”
Still, Curwin acknowledges, there will be winners and losers. He says, “There will be a greater premium on good management teams and providers will be rewarded or punished based on their outcomes. Those providers that don’t provide good quality care, for example, hospitals that have a high number of readmissions, will be penalized under the law.”
How does all of this shake out for bankers and other lenders to the industry? According to Curwin, “The Affordable Care Act may have a chilling effect since many of these lenders are a bit intimidated by the fact that legislation of this magnitude is happening. Those people who aren’t steeped in healthcare day in and day out -- including some senior people at the large generalist banks -- are likely to be wringing their hands these days. I think it’s going to cause some hesitation on the part of many lenders, especially those for whom healthcare isn’t a core area of expertise. At the same time, lenders like MidCap that specialize in the healthcare sector should fare well.”
Still, even experienced lenders are advised to look out for “hidden rakes” or the less obvious fallout brought about by implementation the Act. For example, lenders financing staffing businesses that employ large numbers of people and haven’t to date provided health insurance to its workers will incur new costs under the Act. Curwin explains, “This has less to do with an asset-based loan collateral analysis and relates more to a credit analysis of the company in terms of the implications of the employer mandate. That has been delayed a year, but it is going to happen and it’s going to be a cost on both healthcare and non-healthcare staffing companies that doesn’t exist today.”
From the collateral pool standpoint, Curwin says nothing has changed in the way he approaches asset-based loan opportunities as they arise at MidCap. He says, “One of the issues hospitals face is unreimbursed care. Under the Act, more care will be reimbursed and that in turn will create more collateral due from Medicare and commercial insurers. I think hospitals should actually be a bit stronger from a collateral perspective. It’s going to take a couple of years for this to bear fruit, but the ABL hospital business should be very attractive.”
“Otherwise, the fundamentals are not going to change in terms of how we look at asset-based lending deals at MidCap. Ninety percent of the collateral is due from the government and A-rated payers and that’s going to continue to be the case. That’s why these deals continue to be very attractive at this point.”
And while it’s early in the game, Curwin also doesn’t expect hospitals and other healthcare facilities to drift away from ABL structures as a result of the Act. “We haven’t seen any changes,” he states. “All of this is going to have greater impact on how facilities operate as opposed to how they structure their collateral financings. Even with that, it’s still early and I anticipate many of these things will play out over the next three to five and maybe even ten years. That being said, I think the way healthcare providers operate will change once the Affordable Care Act is fully implemented just because of some of the rewards and penalties embedded in the Act. But none of this will be immediate … it’s going to take time.”
In short, Curwin doesn’t find himself wringing his hands over the Act these days. He and the MidCap team anticipate their next five years to be even more active than their first. “The truth of the matter is that we’re very, very bullish on healthcare lending. It’s been a stressful economic period and in spite of all of the politics associated with it, healthcare has been very stable. It’s been one of the few areas to add job growth and the demographics of the aging population are overwhelmingly positive in terms of the future of the business of healthcare.”
With that, he says MidCap will carry on with its approach of taking a look at each deal from the perspective of doing business with experienced operators with strong track records and unblemished reputations.
Curwin concludes, “We’re excited about the prospects. As long as you understand the market and have a good working knowledge of how the legislation is going to play out and you can gain some comfort there … this is going to be a positive thing for healthcare in general as well as for healthcare providers and those companies that lend to them.”