Is Healthcare Really Recession-proof?
Anyone who has said healthcare is recession-proof, may not have considered the kind of havoc a pandemic could wreak on our healthcare system. All health sectors have been affected. Elective surgeries have been postponed, which has had a huge impact on the revenues of hospitals and surgery centers, supply chains have been disrupted, the nursing home census has declined significantly, and home health has declined. initially took a hit, but began to rebound as patients felt more secure receiving care at home. Other sectors, such as telehealth, are experiencing their heyday in the limelight. Health Affairs published an article late last year suggesting that 2020 will likely be the first year that shows an annual decline in overall health spending since CMS (Center for Medicare and Medicaid Services) began tracking spending in 1960. April 2020 was the biggest drop when health spending fell just over 20 percent. However, health spending has been picking up gradually since then.
Stimulation to the rescue
The CARES Act and the U.S. Rescue Plan Act of 2021, also known as COVID-19 Stimulus Packages, among other packages and executive orders, represented a $ 5,000 billion pandemic relief tab for our country. In addition to the PPP and payroll tax deferral programs, healthcare providers received additional support in the form of other healthcare provider-specific programs, which included:
- AAPP – Accelerated and Advance Payment Program
- HHS Grants (Health and Social Services)
- Medicaid Levels Rise
CMS said it has paid over 22,000 Part A vendors $ 98 billion in expedited payments and Part B vendors $ 8.5 billion. The AAPP Medicare loan program will need to be repaid, putting pressure on already struggling healthcare providers. Collection of Medicare payments starts at 25 percent of Medicare payments for the first 11 months, then increases to 50 percent for another six months. If the debt is not repaid after this time, CMS converts the amount owed into an extended repayment schedule, on demand, at an interest rate of 4%.
The HHS has provided both general and targeted distributions, in the form of grants, to health care providers to help with financial aid through the Provider Relief Fund. The grants accounted for $ 178 billion in payments according to the HHS. Recipients of aid funds must comply with the reporting requirements to receive the rebate. CMS has extended the reporting deadline, but suppliers are required to continue to monitor the appropriate use of payments to CMS to grant the discount, which, if not charged properly, could result in refunds due to the government.
Medicaid rate increases have been handed out by many states in the form of rate increases ranging from $ 5 to $ 40 in additional reimbursement per resident per day. Other states have provided relief by temporarily increasing wages for direct care workers or those whose residents test positive for COVID. The National Governors Association reported that 23 states provided additional payments to nursing facilities and 10 states increased staff payments. Qualified nursing facilities that have dedicated facilities or entire wings to caring for COVID patients received an additional incentive per day.
After receiving all this stimulus money from borrowers, how are health care lenders doing during the pandemic?
Liquidity in the year of COVID
Much of the healthcare-focused stimulus package has been spread throughout the second half of 2020, leaving many healthcare lenders the weight of repaid loans and borrowers with improved liquidity towards the end of 2020. the year. Much of this liquidity remains, particularly in the nursing home sector and in some geographic regions. A study from the Georgia Tech Scheller College of Business, published in March 2021, examined the relationship between cash flow, capital, and COVID with respect to nursing home finances. A finding of the study indicated that “less financially stable companies that could not invest in significant risk mitigation efforts were more affected than financially stable companies that invested heavily in risk mitigation efforts. “. Draw the conclusion that liquidity and the ability to handle a crisis play an important role in the situation of skilled nursing facilities after the COVID pandemic, which has led to the result that the industry is currently experiencing with consolidation transactions and acquisition leading to lending activity.
Liquidity in hospitals plays out in the same way. Fierce Healthcare said, “Greater liquidity, a stable payor mix and more acuity patients have helped large hospital chains end 2020 with huge profits despite the financial roller coaster caused by the pandemic.” While this is true for large systems, small rural facilities have not been so lucky. The narrow, pre-COVID profit margins have intensified the challenges COVID has brought, leading to renewed interest in hospital mergers and acquisitions and a lending opportunity in the hospital sector.
The healthcare market is poised for a continued rebound from COVID as the industry now begins to experience an increase in healthcare employment, hospital visits, outpatient surgery center volume and of the SNF census which is starting to increase again, albeit slowly. Historically low interest rates combined with investor interest in the healthcare sector continue to make lending in this space an attractive opportunity.
M&A activity and a more recent and emerging trend of formation of SPAC (Special Purpose Acquisition Company) could both contribute significantly to the industry. SPACs, in particular, appear to be attracting interest from healthcare investors, with the ultimate goal of getting a private company to go public through a fast-track process similar to that of an IPO. However, blank check companies, as they are known, are increasingly gaining regulatory attention from the government.
Consolidation in the healthcare sector continues to be a trend for 2021 and will likely present the need for new funding opportunities. Consultants, advisers and lenders are hoping for the big push, by banks, to pull out credits for commitments and other pandemic-related defaults, which can only be canceled for so many quarters. Small signs of these conversations started but did not pick up speed. As excess liquidity begins to dry up, we should see more of these opportunities emerge.