Two Sides: COVID-19 and the Impact on Medical Factoring

The COVID-19 pandemic has hurt many sections of the healthcare industry, while it has led to increased revenue for others. Ben Rutkevitz of Alleon Healthcare Capital explores this dichotomy as well government lending programs and what it all means for factors.

BY BEN RUTKEVITZ

The economic impacts of COVID-19 and shelter-in-place orders have been severe. As I write this article, the unemployment rate, which had been on a consistent decline since 2010 and reached its low of 3.5% in February 2020, jumped to 14.7% in April 2020, according to U.S. Bureau of Labor Statistics. Economists were predicting that by the end of May 2020, the unemployment rate would shoot past 20%, and some sectors like hospitality and retail will take years to make up the declines in revenue experienced during the crisis.

The healthcare sector, however, has experienced a 6.79% increase in revenue compared with Q1/19. This stat hides the binary effect COVID-19 is having on the healthcare industry. From Alleon Healthcare Capital’s perspective, there are subsections of the healthcare industry that are losing, while other subsections are winning.

WHO’S HURTING?

Home health agencies that provide medical and personal services to patients in their homes are seeing revenue declines due to a decline in therapy visits, reduced referrals from hospitals that are not performing elective procedures, and staff calling out sick due to the virus. Furthermore, the higher cost of personal protective equipment is increasing agencies’ expenses.

Substance abuse facilities are seeing sharp declines in new business as patients are hesitant to check themselves into a residential center.

Behavioral health centers, such as early intervention programs for children with autism, have had their physical locations shut down due to the virus. Although some patients are utilizing telemedicine and in-home visits, we are seeing a reduction of up to 80% of revenue in this sector.

Hospitals are seeing a loss of revenue due to the freeze on elective surgeries and the general fear of hospital visits experienced by patients. Most hospitals are focusing on COVID-19 patients, but these procedures are not making up for the loss of other revenues.

Skilled nursing facilities have been the most vulnerable during this crisis, as their patient population is made up of the highest risk individuals: senior citizens. Facilities that are not at capacity are able to designate a wing to COVID-19 patients and separate these patients from the general population. Facilities that are full and have an infected patient may see the virus spread quickly, causing deaths and eventually low census.

WHO’S WINNING?

Pharmacies are experiencing an increase in revenue. As part of the Coronavirus Aid, Relief, and Economic Security Act, Medicare and commercial insurance carriers are relaxing their rules to allow patients to order up to 90 days of medication supply. This is a three-fold increase from the previous rule of 30 days.1 Additionally, pharmacies focusing on delivery and mail order are attracting patients who are wary of going into physical stores for their medication.

Laboratories are looking for good capital partners to accommodate the increase in demand. Laboratories testing for COVID-19 require funding to purchase re-agents, swabs and testing kits, as well as to hire additional staff to keep up with demand.

Medical supply companies are experiencing a significant growth in revenue. There is high demand for products like gloves, hand sanitizers, masks, eye gear and gowns. These companies’ customers include medical providers like hospitals, skilled nursing facilities and home health agencies as well as the public. Companies with experience in this space have been able to take advantage of the shortage of supply, especially at the onset of COVID-19. The biggest challenges have been working with qualified manufacturers and staying well capitalized as the size of these orders can be significant.

FUNDING AVENUES

Companies in all the subsections mentioned above have been able to utilize government funding programs, namely the Economic Injury Disaster Loan Program (EIDL), Paycheck Protection Program and Health Care Enhancement Act as well as the Advance Payment Program. These programs have provided much needed relief to medical providers across the board, especially those who have been hardest hit by the coronavirus pandemic, and created some additional issues/concerns for existing lenders.

The Advance Payment Program allowed some providers to receive in advance up to 100% of the Medicare payment amount that is typically received over a three to six-month period.2 The advance is repaid after 120 days as an offset from new claims. So, in essence, Medicare has stepped in and provided a loan to medical providers and taken a senior position ahead of existing lenders. The EIDL provided a low-cost loan based on revenue and will need to be repaid over a specific period, while the PPP, if managed properly, will be forgiven.

These programs are immensely helpful but need to be carefully considered from a healthcare lender’s perspective. Although some of them act like grants and help shore up borrowers’ balance sheets, they also lead to paydowns of existing loans. This can come as a welcome relief to a lender or disappointment in the form of loss of revenue from a good credit borrower. And let us not forget that a lender must be careful to adjust its borrowing base and set up necessary reserves for clients that participated in the loan programs. In terms of new originations, we are seeing many prospective clients take a wait and see approach due to the new or expected funding from these government programs. Extremely low interest rate government loans, forgivable loans and grants are difficult for a commercial finance company to compete against. It is our expectation that these government programs are temporary and meant to act as a Band-Aid while medical providers experiencing strong growth will continue to require working capital lines of credit.

Overall, the coronavirus pandemic’s economic impact on the healthcare space has been mixed. There are segments of the healthcare sector that are experiencing strong growth and continue to require additional capital to meet demand. However, other segments have been severely disrupted and are dealing with loss of morale and the trauma related to losing patients to this pandemic along with decreasing revenue. Hopefully we will begin to see a gradual reopening and some sort of normalcy within the sector.

Footnotes

1. Cubanski, et. al. “Examining Medicare Part D Policies for Extended Supplies of Medication.” Henry K. Kaiser Family Foundation. Apr. 1, 2020.

2. “Fact Sheet: Expansion of the Accelerated and Advanced Payments Program for Providers and Suppliers During COVID-19 Emergency.” Centers for Medicare & Medicaid Services.

Ben Rutkevitz is vice president of business development at Alleon Healthcare Capital.