Q: In the wake of the COVID-19 pandemic, the healthcare industry continues to experience widespread disruption. What are some of the primary challenges facing middle-market healthcare businesses?
A: We are seeing middle-market healthcare businesses, particularly in-patient businesses, struggle with a high degree of economic uncertainty, driven by a combination of factors, including lingering supply chain issues, higher interest rates, inflation, and staffing. Some hospital systems are overwhelmed with mounting debt, and a few have been forced to close. Skilled nursing facilities have also been under stress due to lower admissions and continuing staffing issues.
Q: Why are skilled nursing facilities particularly vulnerable?
A: Many skilled nursing facilities rely on government-based Medicaid and Medicare reimbursements, which haven’t risen to meet the mounting costs driven by inflation. These businesses also disproportionately rely on staffing agencies to fill openings, which is often more expensive than hiring staff outright. With their cost of business fixed and cutbacks on care usually not feasible, they have had to make difficult choices: either refinance their debt if they can or, in some cases, file for Chapter 11.
Q: What role are demographics playing?
A: The wave of aging Baby Boomers is a huge factor across the industry, and it’s a challenge that is likely to come to a head in 2025 when the oldest baby boomers turn 80. At-home healthcare is not presently capable of handling the volume of patients who will require their services or the more severe cases requiring more complex treatment. There needs to be a reset in the healthcare industry and ongoing preparations to meet the upcoming demand.
Q: What does the middle market healthcare lending environment look like today?
A: Healthcare is such a large piece of the economy that lenders cannot afford to ignore it. That said, lenders are in a tricky position, with many unwilling to lend to middle-market healthcare businesses. They understand that these businesses are complicated to run, and, unlike in some industries, there is rarely much room to make operational or financial improvements. Because of inflation, staffing cost/availability and reimbursement issues, lending to healthcare businesses is fraught with risks. Moreover, lenders do not want to be publicly associated with closing businesses, which can be critical for communities. Many of these organizations cannot be restructured effectively.
Q: How do you anticipate these challenges will play out in the coming months? Do you expect to see more defaults?
A: In the near term, there doesn’t seem to be an immediate solution. However, large healthcare systems have an advantage over smaller ones and are better prepared and able to handle expense, staffing, and reimbursement issues. Among smaller healthcare systems, there may continue to be some defaults and closures unless they merge into a larger healthcare system.
