The onset of the COVID-19 pandemic has placed an obvious strain on the U.S. health care system, and not just in the area of patient care. The crisis has created enormous financial challenges for providers of all types and sizes, from small physician practices to multi-state health systems. In many cases, these new stresses have only served to accentuate and magnify the financial difficulties that organizations faced before the start of the crisis.
At this delicate juncture, health care organizations need to know their financial weaknesses and risks, consider their options and develop a plan for addressing them – now, before the problems get too big to handle.
What to Do Right Now
First, you need a clear-eyed view of the situation you are facing. Pull together a team internally, along with outside professionals, to look objectively at your financials and your business plan. Together, this team can begin compiling a list of actions to take immediately.
One of the first items to address: A commitment to communication. Lenders, landlords, major vendors and other creditors understand the macro-environment and will appreciate hearing from you proactively. Often there are solutions in mutually open conversations.
At the same time, look for short-term relief and financial support through CARES Act funding programs and other sources that may become available as a result of the COVID-19 crisis. Congress has passed a recent funding extension to the CARES Act geared specifically to the health care industry.
The new bill allocates an additional $75 billion to “eligible health care providers” for COVID-19 response. Eligible health care providers include public entities, Medicare and Medicaid enrolled suppliers and other for-profit entities and not-for-profit entities that provide diagnoses, testing or care for individuals with possible or actual cases of COVID-19.
Signs of Stress
With the focus squarely on patient care, you might have had to table a few outstanding operational issues. But with the epidemic seemingly reaching a plateau and attention turning to re-opening the economy, now is the right time to take stock of your situation.
The signs of strain may differ from one provider to another. But potential issues to evaluate include:
- Inadequate cash flow to sustain operations
- Defaults with lenders — financial or by covenant
- Credit shutoff or lawsuits from trade creditors
- Lawsuits from residents/patients and their families
- Violations/fines/compliance issues with the Department of Health
- Difficulties with employees/payroll/withholding taxes
- Involuntary bankruptcy
- State-appointed receiverships
Consensual Workouts as a Potential Solution
A workout is a way to consensually address financial distress, through a short- or long-term plan involving a lender, borrower and other creditors.
Workouts are an alternative to collection litigation, foreclosure or exercise of other enforcement remedies, and can include a range of solutions such as forbearance agreements and/or modification of the terms of a relationship.
Some additional elements of a consensual workout:
- Restructured and/or deferred payment terms
- Partial pay down/payoff through voluntary downsizing or sale of assets
- Consolidation, acquisition or merger options
- Voluntary surrender of collateral or pledge of additional collateral
- Consensual or uncontested foreclosure or deed in place of foreclosure
Bankruptcy for a health care provider may be voluntary or involuntary. It is also a last resort. But, keep in mind that there is currently an increased debt limit for “Small Business” Chapter V bankruptcy reorganizations for one year up to $7.5 million, which allows for a less costly, more streamlined reorganization in court for small businesses. For larger debt structures, organizations may still be able to use Chapter 11 for restructuring. Relief from collective bargaining agreements may be sought. Under many circumstances, a health care ombudsman will be appointed to monitor patient and resident care.
More than anything, it is important to be flexible. Your plan will change based on evolving circumstances as well as new legislation. Our attorneys are available to help you develop your strategy. The Harris Beach Health Care Industry Team has been at the forefront of structural change and regulatory compliance for many years. And our Financial Restructuring team assists clients who face countless statutes and complex procedures to ensure that all financial restructuring, bankruptcy and creditors’ rights issues are resolved to their best benefit.
Visit our COVID-19 resource page for other information regarding the pandemic.
This alert does not purport to be a substitute for advice of counsel on specific matters.
Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.