Can healthcare borrowers cope with Obamacare?

Does your bank lend to healthcare facilities? Then your lenders must not only have a good working knowledge of the Affordable Care Act, but be certain that your healthcare borrowers have their operations in shape to cope with major changes in the provider landscape.

In Part I of this article, published recently, “An Obamacare alert for health lenders,” we considered the current backdrop to healthcare business lending during the continuing implementation of the Affordable Care Act (ACA). We discussed the importance of analyzing your borrower's actions to join an Accountable Care Organizations (ACO) network or Bundled Care Payment for Care Improvement (BPCI) initiative; what steps they have taken to build a technology and electronic data infrastructure; and how they are reducing readmission rates.

In Part II of this article, we will suggest additional questions that healthcare lenders should be asking their borrowers, and the kinds of issues your borrowers should be considering when answering the questions. We pick up with Question 4, continuing the sequence from Part I.

More questions to ask your healthcare borrowers

Q4. What are you doing to adjust for reduced length of stay?

Long-term care providers are seeing reduced length of stay, as custodial care shifts increasingly to short-term rehabilitation care or to other types of assisted living facilities.

Despite the growing senior population, the American Health Care Association, in its 2013 AHCA Quality Report, reported that the overall occupancy rate of skilled nursing facilities (SNFs) has declined from 89% in 2007, to 86% in 2013. The association attributed this growing weakness in census at many properties to the expansion of home health and community-based or assisted living facilities as the preferred long-term care provider. Additionally, ACHA reported that in 2013, an SNF mirroring the national averages would serve 189 short-term care patients compared to 86 long-term care patients. 

As length of stay shrinks, borrowers have to effectively manage reduced reimbursement rates that come from shorter stays. They must determine a strategy for effectively serving short-term patients. Their focus must shift to clinical capabilities, and efficient and results-oriented care. This will require many traditional skilled nursing and seniors housing properties to consider different business models than traditionally seen.

An operator's well-thought-out business plan must identify and implement strategies to address the industry's reduced length of stay. Those nursing facilities that are not prepared for this significant shift will miss out on the growing number of short-stay, post-acute patients. And they will need those patients, to address their growing census problems.

A new transformative model of innovation is required for long-term care borrowers to survive.

There are incentives for those borrowers willing to take risks in transforming their business models. Centers for Medicare and Medicaid Services (CMS) have funding available to reward organizations that are implementing the most compelling new ideas to deliver healthcare. Innovation is encouraged.

Healthcare operators have to spend time considering innovative planning, because business as usual is no longer feasible. Long-term-care borrowers should be spending significant time planning and implementing business plans to take advantage of the new post-acute space care management.

And a healthcare lender should understand what steps its borrower is taking along these lines.

Q5. What has been your recent experience with litigation claims? What is the current status of your insurance coverage?

Industry observers agree that there will be an uptick in litigation related to nursing home and seniors housing.

A joint study by Aon and the American Healthcare Association revealed that although the average number of claims per year declined from 2005 to 2011, the average claim increased by more than 4%. This greatly outweighed the decrease in the number of claims and suggests increased exposure for the industry.

Although many insurers left the long-term care industry a decade ago, they are starting to return. At the same time, plaintiffs' lawyers are figuring out other pockets of money to pursue for wrongful death and injuries, so insurance costs are creeping back up.

While industry leaders push for tort reform due to increased costs of operations based on litigation defense, those efforts have mixed results, and vary widely by state. For example, the loss rate per occupied bed in West Virginia significantly exceeds that of the loss rate in Texas, based on each state's tort laws.

The end result is that after a few years of leveling off of plaintiff's litigation against long- term care facilities is increasing significantly on a yearly basis.

As a lender, you need to understand how the borrower is positioned to handle litigation and managing risk. It is also vital to understand the extent of insurance coverage as well as the legal framework in the state in which the borrower is operating.

Q6. How are you addressing the capital and life safety needs of your facility in light of the growth of new construction?

The pendulum on new construction in the healthcare industry has swung back to aggressive growth. Many communities have experienced a significant increase of new buildings over the past year. Texas is one of the primary states where new construction is on record pace.

This focus on new buildings will challenge existing providers to elevate their game on several fronts, including physical plant, quality of care, technology integration, and reputation.

The owners of the new buildings will seek to become the community leader in care—in order to grab referrals as part of the ACO or BPCI networks. New construction may lend itself to the formation of ACOs based on location and sharing of building costs with its members.

This puts increasing pressure on existing owners and operators to remain competitive in the marketplace with older physical plants.  Lenders must understand the existing borrower's plans for capital expenditures, physical plant, and life-safety issues.

Equally important is the social and relational strategy of the borrower. There is documented evidence that a quality provider who builds loyalty through relationship, social interaction, and connectivity with the family can remain relevant and thrive in the face of competitors with new buildings.

When residents are connected to the staff, family members are well-informed and updated regularly, and a family setting is a core principle of the facility, they will want to stay with the people they know. They will also refer friends to the facility.

Additionally, borrowers who solidify their position as quality care providers will attract ACO partners, who will want results-oriented partners over those less-proven, regardless of their facilities. New construction does provide marketplace competition.

However, if a facility builds a strong and loyal culture on documented quality care, your borrower can continue to grow.

Q7. What are you doing to more effectively train your team to meet the demands of an educated customer base and their families?

The senior housing industry keeps evolving. Residents come to the healthcare continuum with differing levels of need. Customers and their families are more educated as to these needs and the expanded comprehensive assistance available for family members. This marketplace reality requires providers to develop enhanced clinical competencies, leadership, communication skills, and quality of care in order to compete.

As the demand for quality post-acute care continues to grow, healthcare borrowers must stay ahead of the curve in training and leadership to navigate future success in the evolving marketplace.

The operational strategies to meet consumer's expectations in the current healthcare environment include reducing length of stay, gaining market share, building a strong clinical reputation, developing effective communication practices, and becoming "best in class" in the community through effective training, staffing, and procedures. These strategies are supported through a robust and focused training program at the facility.

Some important areas that a lender should discuss with its borrowers to ensure that they are addressing the training needs in this new marketplace include:

• Extent and depth of staff training.

• Priority areas of training.

• Leadership development.

• Increasingly complicated clinical needs of residents.

Industry leaders in training have developed integrated care management programs that include dedicated care managers; centralized intake and patient placement; joint quality committees with network partners; active physician involvement; leadership skills training; and technology interoperability.

Additionally, borrowers need to ensure that their staff are well trained in the use of their technology, such as effective use of their electronic health records (EHR) systems and data analysis systems.

Healthcare providers must actively show leadership in training and implementation of such care management programs to compete and secure new residents.

The accountability and transparency in today's healthcare marketplace places a premium on providers exceeding customer's expectations. Family members will shop for alternate care providers who provide proven results.

As a result, the healthcare industry is shifting to a consumer-driven world. As a lender, you must understand how your borrower is positioning itself, through effective and thorough training, to meet these demands.

Q8. Have you considered project management tools to succeed in the new regulatory environment?

U.S. News & World Report ranked project management as one of the most valued skills for employees, behind only leadership and business analysis.

With the changing face of healthcare, project management is a discipline critical to long-term success. Industry experts anticipate increased job growth in the field, which it has labeled "Health Informatics." Effective project management focuses on planning and collaborative interaction among multiple players with an emphasis on the use of technology as a means to drive efficiency.

Healthcare providers need predictability and accountability to improve health care delivery performance to take advantage of the new regulatory framework in which they operate. By more efficiently incorporating technology and training, a certified project manager can help achieve these goals.

A successfully implemented project management program can assist in several ways:

• Implementation of standards and controls to decrease hospital readmissions.

• Assist in the implementation of EHRs, which is required for the borrower to continue to serve patients receiving Medicaid and Medicare.

• Assist with the integration of the technology systems used by affiliated providers.

• Develop strategies or a framework to drive revenue, ensure compliance, and increase profitability.

Borrowers also can use the data gathered through project management to promote themselves as a strong referral source. Essentially, a good project management team can help to implement the training and technology discussed above, that is essential to the borrower's longevity in the industry.

The lender who investigates whether the borrower is considering project management can  provide fertile information on how the company is positioning itself in the marketplace and help guide important discussions.

Q9. Have you considered consolidation to address the changing healthcare landscape?

Many industry observers expect widespread industry consolidation in the post-ACA world. (Editor’s note: This is not unlike the set of challenges facing many banks.)

Owners of individual, small, or medium-sized healthcare providers have less financial leeway because of tightening margins. Reduced reimbursements, a paradigm shift in the type of care patients are receiving, and the capital expenditures to compete with new buildings and to build technology platforms all pressure operators to combine resources to meet the ever-increasing demands of healthcare under the ACA.

Additionally, there are significant incentives under CMS regulations to increase patient size across a network of providers. One example is the minimum patient thresholds that an ACO must meet to qualify under the Medicare program. To qualify for the shared savings program, the ACO must service 5,000 patients across its foot print.

Thus, there are incentives for members of an ACO to partner with larger providers, especially in rural areas where providers may have difficulty reaching the threshold to qualify under CMS regulations.

There will also be a major shift in the type of care that patients require.

Institutional care will be reduced as there is a strong push towards home health, hospice, palliative care, assisted living facilities, independent living facilities, and various other new models along the spectrum. The American Health Association published a study on relationships between post-acute care providers in integrated hospital systems, which showed that in 2009, the number of patients discharged to home health providers was equivalent to the number discharged to skilled nursing facilities, with 31.8% being discharged to home health providers versus 31.3% to SNFs.

The number of discharges to home health providers is likely to increase as ACOs focus on reducing costs to receive greater incentives under CMS' shared savings program. Additionally, a large number of patients received some type of care from a home health provider after being discharged from an SNF.

However, although lower acuity settings will benefit because of the push down stream, there is still a need for bricks and mortar locations for patients. Thus an SNF may consider consolidating with home health providers in an effort to increase revenues in a growing segment of the industry, while maintaining the capability of serving patients in- house. Thus, small or medium-sized networks should consider whether consolidation with other owners along the healthcare continuum is required to remain fiscally healthy and responsible.

There will also be a narrowing of post-acute networks, while health plans will build deeper partnerships with a few strong, high-quality relationships. Providers will continue consolidating around hospitals and readmission penalties will result in hospitals getting into closer alignment with good operators.

Thus, the new normal points to scale being an advantage in operating the healthcare industry of the future. Those operators who are slow to start thinking about consolidation or growth strategies to address the economies of scale favored by the ACA will suffer.

As you monitor healthcare borrowers' emergence into today's marketplace, consolidation is an area that will indicate a borrower's ability to think proactively in order to remain relevant. While the lender cannot dictate that its borrower pursue such action, it is an indication of the possible long-term prospects for recovering its loan.

Bringing things together

The enhanced integration of and support of emerging models of care delivery requires significant investment of time, energy, talent, and money. This can be challenging for owners and operators with limited resources. Preparing for the evolving post-acute care environment requires a systematic approach focused on clinical capabilities, physician engagement, and development of a network of relationships.

Ultimately, the ability to become an active participant in a continuum network will determine an operator's short-term success and more generally influence how payers, providers, and policymakers change the accountable-care model in the future.

Uncertain reimbursement rates, increased cost to build technology infrastructures, shorter length of stay, increased competition through aggressive construction, limited partnering opportunities along the care continuum, and increased consumer expectation and demand, among other factors, are causing seismic shifts in the industry.

The failure of owners and operators to adapt will lead to financial challenges staying afloat. Not only is it critical for the provider to actively pursue initiatives to better position itself for the long term, a healthcare lender must understand these industry drivers and identify if its borrowers are responding.

The failure for the lender to identify and react to red flags early in the process could lead to increased difficulty protecting the bank's investment.

About the authors

Tim Lupinacci is a shareholder in the Birmingham office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. He chairs the firm’s Financial Institutions Advocacy Practice Group. His practice primarily focuses on representation of financial institutions and CMBS special servicers in financial distress, restructure, and bankruptcy and workouts of defaulted commercial loans.  He appreciates the assistance of Justin Stephens, an associate in Baker Donelson’s Baton Rouge office, in an early draft of this article.

Renee Decker is an associate in the Fort Lauderdale office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. Her practice primarily focuses on representation of national lending and servicing clients in creditors rights and bankruptcy matters.