Hundreds of physician practice acquisitions and healthcare-related transactions are in process at any given time. When the COVID-19 pandemic hit, the accompanying shutdown threw many such transactions into a state of uncertainty.
Recently, we spoke to Bob Homchick about today’s acquisition environment. A partner with Seattle-based Davis Wright Tremaine, Bob has played a leadership role in the American Health Law Association for many years. During our conversation, we identified six fundamental ways that COVID-19 will impact healthcare transactions currently underway, as well as those that may commence after the state of emergency ceases.
1. Timing Will Be Unpredictable.
During the COVID-19 pandemic, many transactions were put on hold. As the pandemic ends and waivers are lifted, the industry will be faced with two anomalies: First, all players will have to wrestle with how to arrive at a Fair Market Value (FMV) for practices that have been virtually shut down for the majority of 2020. Second, many physicians will find the financial health of their practice redefined by the pandemic, which may create a greater urgency to sell, but impact their ability to arrive at an FMV that is acceptable to all parties.
In this setting, sellers and buyers may attempt to expedite a transaction to achieve their pre-COVID goals, while others will delay a planned transaction until something resembling normalcy returns to the market.
“You may find that some parties are looking for a fast close,” says Homchick, “while others are reeling from limited resources, a decline in high-margin elective surgeries, or overall poor financial performance. I think you’ll see many deals stop, start, or rush to closure a little too fast.”
2. Client Prepared Projections Will Be Set Aside.
It’s a simple fact: any client-prepared financial projections made prior to March 2020 are virtually obsolete. For example, elective surgeries were temporarily suspended. In a post-COVID, socially distanced world, how quickly will patients want to reschedule? Will they cancel or delay their plans? Will they go to hospitals or ASCs? The cash-flow disruption caused by COVID-19 and the uncertainties surrounding the recovery will create a need to reevaluate any client-prepared projections. Future projections may lean more towards a Discounted Cash Flow methodology, rather than a Capitalization of Earnings. Likewise, the traditional five-year projections may give way to a time period that more appropriately reflects the operations and outlook for a practice.
3. Short- and Long-Term Liabilities Will Be Re-Examined.
“During the pandemic, almost everyone has benefitted from the CARES Act, FEMA, PPP Loans or other federal funding,” says Homchick. “But those programs came with some very onerous terms, conditions, documentation and restrictions.”
As we emerge from COVID-19, it will be important to look at the liabilities and long-term ramifications that stem from these arrangements. Just as importantly, it will be crucial to ensure that a practice is compliant and able to document that funds were used appropriately. In short, the emergency assistance offered during COVID-19 brings a new layer of liability, due diligence and uncertainty to the table.
4. A Greater Emphasis Will Be Placed on the Future Payor Mix.
The COVID-19 pandemic came hand-in-hand with a spike in unemployment. For millions of Americans, that means a shift from private insurance to Medicaid — or no insurance at all. How long will that last, and how will it impact reimbursements? Will unemployment be higher or lower one or two years from now? No one has the answer to these questions — which poses a tremendous obstacle for projecting future performance and arriving at FMV for physician practices, clinics and other facilities.
5. No One Knows What the Post-COVID Environment Will Look Like.
During COVID-19, “business as usual” fell by the wayside. Waivers were put in place, regulations lifted, and some rules governing telemedicine were set aside. The use of telemedicine apps exploded. Physicians were given hazard pay. PPE and other short-term needs impacted margins.
When the state of emergency officially ends, how many old regulations will come back, and how many will be dropped or rewritten? This area is impossible to predict, as it rests not only on clinical, payor and patient demands but also on federal legislation and the outcome of the upcoming elections.
6. Acquisition Agreements May Become More Fluid.
Six months ago, there was a sense of finality with the closing of a transaction. But COVID-19 brought with it a total disruption of the traditional acquisition framework. Today, much of our pre-COVID data is obsolete, and any meaningful post-COVID data may not begin to surface for another year or two. Despite this, many practices and networks may still feel a pressing desire to close a deal and move forward.
Against this backdrop, it may be necessary to forge agreements that accommodate a future reassessment or adjustment of terms. Today, future market demand, payor mix, regulations and financial projections are all called into question — each of these impacts fair market value. In the near term, any transaction may be accompanied by stipulations that call for a periodic reassessment to ensure that the acquisition has been fair to all parties.
In the end, everything leads back to fair market value. And in an era where the healthcare market’s defining metrics have been thrown into a state of temporary chaos, it will take some time before we can all agree on how FMV is defined.
For a continuation of this discussion with Bob Homchick, stream or download our podcast.