Healthcare provider companies that serve patients and affiliated organizations are straining to keep up with the spread of the novel coronavirus. While working to maintain operations, the leaders of healthcare companies also must consider the business implications of this crisis.
Here are ten operating considerations for healthcare companies grappling with COVID-19, and three deal considerations for companies active in the transaction space.
1. Redouble Your Risk Assessment Efforts. Name a task force, with board oversight, to implement your risk mitigation plan and constantly reevaluate business risk as the crisis evolves. The pandemic and efforts to stem it are having huge impacts on the regulatory environment—keep up with the latest guidance from the Centers for Medicare & Medicaid Services (CMS), the Centers for Disease Control and Prevention (CDC), and other agencies.
2. Focus on Problem-Solving with Your Clients. During a crisis, we instinctively hunker down and focus inward; instead, at this time, be proactive with your clients and partners. Communicate the risks you have identified and your mitigation plans. Invite your clients and partners to collaborate with you to solve problems: Most will be open to this approach and will appreciate your candor.
3. Review Information Systems (IS) and Data Privacy Measures. The spread of COVID-19 has expanded the use of telemedicine and remote work, putting intense pressure on IS infrastructure and policies, especially cybersecurity and data privacy. Evaluate the suitability of IS capacity, vendors, and policies for this new reality.
4. Evaluate Financing Needs and Options. Update financial projections to evaluate your cash needs over the next six to nine months. Then consider drawing on available credit facilities and requesting equity infusions from investors. Check the impact of borrowing on covenant compliance and consider approaching lenders proactively about a potential covenant default. With the sharp economic slowdown, some lenders are not fully funding available amounts under existing credit facilities.
5. Determine whether CMS Waivers Apply. CMS announced blanket waivers on March 13 under Section 1135 of the Social Security Act, relaxing certain regulatory requirements in response to the COVID-19 pandemic. A separate blanket waiver for telehealth was announced March 17. Review whether your company can use this flexibility to better serve patients.
6. Analyze Force Majeure Clauses for Material Contracts. For contracts that require your company to provide services, evaluate whether force majeure could provide relief from performance. Likewise, analyze contracts with suppliers and vendors to assess whether they are likely to cite similar outs—this will have an impact on your company’s ability to maintain uninterrupted service.
7. Manage Your Workforce. Set the right tone by being empathetic to employee concerns. Communicate the ways you are assessing and mitigating risks. Consider more flexibility in work-from-home arrangements, with proper supervision and data security. Also, stay on top of employment regulatory changes, as several federal regulatory bodies have issued guidance for employers.
For companies active in the deal space—transactions are still moving forward—here are three additional things to consider.
8. Be Prepared for Robust Diligence. Investors are looking for signs that a target company has mishandled the crisis, damaging relationships with employees, patients, or partners. Lenders will increase scrutiny of borrowing needed to complete a transaction. Insurers will engage in a much more robust underwriting process for representations and warranties insurance.
9. Consider Impact on Deal Terms. Many sellers will want to find carveouts related to COVID-19 to ensure the deal closes. Buyers should weigh contingencies carefully, such as a financing contingency because of the volatility of credit markets. With more closing contingencies built in, buyers also may want to consider negotiating interim operating covenants that address compliance with certain COVID-19 guidelines.
10. Analyze Existing and Proposed Earnouts. The coronavirus pandemic likely will affect financial performance metrics and the ability of recently acquired companies to achieve earnouts and other performance-based payments. For earnouts with measurement periods impacted by the current COVID-19 crisis, consider whether, based on the circumstances, the period should be extended or metrics modified—in particular if the earnouts are payable to key employees.
Healthcare companies can be proud of the way the industry has come together to serve patients and rally the nation to fight the coronavirus pandemic. Company leaders need to anticipate the business issues this effort will raise as best as they can in a rapidly changing environment.
Angela Humphreys is chair of the Healthcare Practice Group at Bass, Berry & Sims PLC and co-chair of the firm’s Healthcare Private Equity Team. With more than 20 years of experience, she counsels private equity firms and national healthcare organizations on mergers and acquisitions and investments in the healthcare sector. She can be reached at [email protected]