There are several key trends making an impact on the financing market today with a specific focus on healthcare and ambulatory surgery centers.
"Healthcare is a very specialized niche," says Jim Irwin, President of MC Healthcare Finance. "In the world of generalist asset-based lending, healthcare is often perceived as an orphaned asset class. Banks appreciate the size and favorable demographics of the healthcare industry but also realize that financing this industry is not for dilettantes. However, with the upheaval in the real estate market, banks have a need to add consumer and industrial (C&I) loans and in many cases are trying to figure out how to prudently loan to this industry. We have built MC Healthcare Finance to be not only a direct lender to healthcare providers but to also provide a robust servicing and lending platform to partner with banks."
Mr. Irwin discusses five big trends and why they are important for ASCs going forward.
1. Banks aren't lending. Banks' appetite to lend to small business is not nearly as great as it was five or 10 years ago. Healthcare providers face an even greater uphill battle because many banks aren't set up to lend to the healthcare world.
"Even in the best of times, healthcare isn't well understood by traditional lenders," says Mr. Irwin. "There are many aspects of healthcare lending that frankly scare non-specialized lenders. For example, banks are often unfamiliar with the third-party payment stream, HIPAA provisions, significant receivables dilution and government anti-assignment requirements associated with lending to the healthcare industry. Most lenders are much more comfortable funding assets or receivables in which they can more easily evaluate contractual economic transactions between buyers and sellers in which the lender knows with reasonable certainty how much will be paid, and when, and in which they can straightforward perfect their security interest. In healthcare, you don't know when or how much you will be paid, for example."
Today's regulatory environment is also prohibitive for banks, particularly in smaller communities. These banks in particular are keeping their capital tight. "Community banks know enough about healthcare to realize that they lack the expertise to effectively fund healthcare loans as a matter of course," says Mr. Irwin. "They appreciate the size of the healthcare industry and the immutable demographic changes occurring but they also realize they lack the expertise and infrastructure to be able to prudently lend to it."
2. Immense consolidation among lenders. Ten years ago, it was not uncommon for businessmen and financiers to strike a deal with a handshake over an evening dinner. Today, that isn't really happening. Immense consolidation within the industry makes intimate relationships difficult with most lenders. Historically the primary lenders to the majority of the healthcare industry have been community banks which often enjoyed close personal relationships with their healthcare clients.
"The ranks of community banks, which traditionally have been the primary lenders to the healthcare industry, have been dramatically winnowed," says Mr. Irwin. "Surviving small community banks typically lack the infrastructure to effectively value, track and monitor healthcare receivables, resulting in restricted loan advances which throttle healthcare providers."
Furthermore, with FDIC regulations today, any bank with under $1 billion of assets is in danger of being acquired, which will further limit most ASC's borrowing options.
3. Increasing demand for med tech financing. Ambulatory surgery centers are seeking financing at higher levels today particularly for medical technology. They are purchasing new instrumentation and electronic medical records programs to stay ahead of the curve while at the same time facing the likelihood of lower reimbursements.
"Now that President Barack Obama has been re-elected, you will see increased pressure to dramatically decrease reimbursements," says Mr. Irwin. "For ASCs, if they can successfully navigate these waters, this is growth opportunity because they provide about 40 percent of all surgeries in the United States. Their expansion is seen as a vehicle capable of decreasing the cost of performing surgery."
If surgery centers are able to successfully bring EMRs to enhance workflow and quality reporting, while also purchasing the equipment necessary for new higher acuity cases, they may see an increase in direct case volume for stakeholders.
"There aren't a lot of financing options, which is why we formed our company," says Mr. Irwin. "In some markets, you see a longstanding relationship between the surgery center and community bank, but if that bank is bought or restricts loan advances it can significantly impact an ASC’s ability to accommodate growth. They are also dealing with regulatory requirements for capital acquisitions and in some cases equipment."
4. ACO formation. Accountable care organizations, or similar risk sharing ventures, are springing up across the country and making an impact on the ASC market. ACOs could function as clearing houses that provide contracts to the lowest bidder and ASCs are poised to take that position.
"If you bid too high you won't get the contract and if you bid too low and win the contract you'll lose money," says Mr. Irwin. Surgery centers must focus on profitable markets such as out-of-network spine surgery to be able to boost profit margins in this environment. They will also have to co-exist with, if not participate in, an ACO. "It's a difficult environment."
For seasoned physician groups, there is a different dynamic because they are often viewed favorably by the banks and are seen as good credit risks. However, physician groups will have the same accountability as other providers in the future as the ACO dominated paradigm is implemented.
"ASCs will need to know their cost structures very well," says Mr. Irwin. "They need to figure out that balance to maintain profitability in an environment of decreasing reimbursements. As a result of ObamaCare, 30 million more Americans will be eligible for insurance and patient volume will increase dramatically. Healthcare providers will have a hard time accommodating those patients while keeping their costs down."
5. New opportunities for financing. Where some of the traditional capital opportunities have dried up, there are new opportunities for healthcare providers. Some are looking into private equity while others are working with financing companies, few of which are focused on healthcare.
"Given the changing landscape of healthcare, a prudent CFO should have a line of credit in place to accommodate growth, uncertainty and a rainy day. They should put together a strong financial package," says Mr. Irwin. "If I were running an ASC, I would have a robust business plan supported by clear eyed financial projections and proof of in-depth industry knowledge. You need to show that you understand the landscape, or at least have developed contingency plans, as well as appreciate what a lender looks for in a potential borrower."
Surgery centers should have a critical mass, such as a minimum amount of receivables, and transparency. They must have a strong though not necessarily deep management bench, decent infrastructure and clear financial reporting. "Get your house in order, have cohesive financials and intelligent projections," says Mr. Irwin. "Have a clear, well thought out and articulated plan for why you need the money."
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