Many PE-backed companies are likely excluded from the paycheck protection program offered under the CARES Act; however, there could be exceptions involving investments in the management entities of physician practice groups, according to industry experts.
Based on the language in the Coronavirus Aid, Relief, and Economic Security Act, the prevailing view at the moment is that portfolio companies where the PE firm has a controlling interest may be considered an affiliate – and thus many would not meet the 500 employee size limit.
That said, industry lawyers are having conversations with their clients around potential exceptions, including: investments made in physician practice groups through a management service organization, or MSO.
“We’re looking at potentially where some of those practices could apply and [where their PE partner] may not be considered an affiliate,” Rick Zall, chair of the healthcare group at Proskauer Rose, said. “Those practices have clinical control … And that’s a potential avenue for participation.”
“Everyone is scrambling to get payroll protection loans because of the forgiveness element, [however things] continue to change – not day-by-day but on an hour-by-hour basis,” added Angela Humphreys, who leads the national healthcare practice at Bass, Berry & Sims.
“The question is: Can the practice decouple from the management company and apply independently for the SBA loans?” Humphreys said.
Under an MSO model, a management company is created to operate a professional entity that does things like handle billing and collections, among all other non-clinical business support for a physician group. In these deal structures, which have become increasingly common, the PE firm owns the non-clinical piece of the business, while physician owners retain 100 percent of all clinical assets.
Late last week, new guidance confirmed that minority PE investors will still constitute as “affiliates” if they can block board action.
That means that arrangements in which PE sponsors control these MSOs – either through majority ownership or board control – are going to be aggregated with their sponsors, and therefore will not be eligible, Zall said. On the other hand, practices that are run from a clinical perspective by physician owners and physician boards who have oversight of those activities – even though they have sponsor partner – could still be eligible.
Zall said he expects many in the latter category to apply, clarifying that the SBA loans would cover the payroll costs of the doctors and other clinical workforce, and not the non-clinical MSO staff in which the PE firm invests.
Humphreys agreed that whether an MSO model qualifies will depend on how the management relationship is structured and will vary case by case.
“States that have more restrictive corporate practice prohibitions may serve the PE firms well [in this situation] – restrictions that you otherwise would not want to have,” Humphreys said.
In other words, more restrictive states such as New York and New Jersey don’t allow management companies to have the same level of financial control that other states might, and thus may be in a better position to apply for the loans. “It’s somewhat up in the air,” Humphreys cautioned.
New guidance late last week around the CARES Act also clarified that independent contractors are not counted as affiliates of a company, leading to new implications.
Healthcare companies that rely on independent contractors can assist those individuals to apply directly and independently get financial aid, Zall said. At the same time, the new guidance could also help some companies because it takes independent contractors out of the employee count.
In healthcare, many telehealth companies and PE-backed physician staffing companies that provide outsourced services to ambulatory sites could benefit, Zall said.
That could prove impactful to independent contractors of financially constrained PE-backed physician staffing giants such as Blackstone Group’s TeamHealth or KKR’s Envision Healthcare, both of which are reportedly cutting staffing and pay. Bloomberg reported Saturday that Envision has seen its business shrink by up to 75 percent.
Advanced/Accelerated Medicare Payment Program
Much of the immediate conversation has been around SBA paycheck protection loans for businesses impacted by covid-19. There are many other potential avenues to new funding streams or other measures of financial relief under the CARES Act.
For most PE-backed healthcare providers, the Advanced/Accelerated Medicare Payment Program appears to be the most immediately available and directly impactful initiative, according to Farragut Square Group President and Political Strategist Brian Fortune. “Pretty much everyone with Medicare volume can access this.”
As its name suggests, the rule allows healthcare providers and suppliers to apply for accelerated or advanced Medicare payments through the covid-10 outbreak, with specific grace periods for repayment of funds. The program extends beyond an existing CMS program aimed exclusively at inpatient hospitals.
For many healthcare providers that are suffering from a short-term drop in patient cancellations as elective procedures are called off, this program could be particularly valuable.
“Given the situation, a lot of providers are looking to avail themselves to help bridge that cash flow,” Humphreys said. “Suffice to say people are looking at the current situation in days, not weeks or months.”
That leads to one longer-term question for any ambulatory surgery center provider or PPM business facing a delay in elective procedures, Fortune said: “What’s your [ramp up] capacity when the lights go back on?”
In other words, Fortune said, if you delay a portion of your elective procedures and you also get advanced payment based on procedures you would have done, what’s your catch up or overflow capacity? “What’s the ability or willingness of physicians at ASC platforms to schedule more [surgeries or procedures]? Do they want to? Can they?”
“There’s a functionable limit,” Fortune said, and thus the question becomes: what portion of revenue is delayed versus forgone?
While helpful from a liquidity perspective in the short term to many providers looking to stay afloat, Zall said repayment of the funds could be really tough.
“Providers and lenders are asking: ‘If we take that money to help with immediate liquidity issues, is there a path to repayment?’ It will require either more equity or more debt for companies like nursing homes that are struggling now to meet needs,” Zall said.
Humphreys said it would not surprise her if some practices elect to have extended hours or weekend hours to try to recoup some of the revenue if there is pent up demand. That strategy will lend itself to many providers which are compensated on a percentage of collections, if they are so willing to do that, she said.
On the other hand, she said, “will there be some reticence to have elective procedures in the first few months coming out of this when there is some economic uncertainty in place?”
In other words, the question remains if there will be reluctance from people that still have not satisfied their healthcare deductibles to move forward with elective procedures, and particularly those with high deductibles.
In some cases, the lender community and distressed investors are taking measures of that, considering if there is either an opportunity to swoop in on assets that are fundamentally sound businesses that can recover quickly, Zall said. In other scenarios, Zall said, the strategy might be, “how do we exit with as little damage as possible?”
There are a number of other healthcare-centric programs that folks are continuing to keep tabs on – ranging from the expansion of telemedicine coverage to the U.S. Department of Health and Human Services’ $100 billion emergency fund tied to covid-19 related treatment or diagnosis.
“It’s moving very fast,” Zall said. “There’s an awful lot out there and people understand that healthcare providers that are the first responders here need help. Our hope certainly is that they’ll be as flexible as possible.”
Action Item: Read more about the Centers for Medicare & Medicaid Services’ expansion of the Accelerated and Advanced Payment Program