Healthcare Private Equity and COVID-19: Considerations as Provider Platforms Reopen

Businesses are starting to reopen as stay-at-home orders and business closures resulting from the novel coronavirus (COVID-19) begin to ease. Unfortunately, reopening likely will not be an immediate return to business as usual. The impact of closures will take time to overcome. For providers who render non-emergent services and procedures, many offices closed and elective procedures were postponed due to the pandemic. At the same time, the healthcare industry faced a surge in necessary emergency/hospital care, creating a different impact in various sectors of the industry. It is critical that providers carefully restart operations after addressing COVID-19-related challenges. What follows are nine areas to consider during the reopening process.

1. Monitor state and local orders. The Trump administration’s guidelines for Opening Up America and the Centers for Medicare & Medicaid Services (CMS) first phase of recommendations for reopening medical facilities focus on following state and local public health officials’ guidance. Most states are reopening businesses and the economy on a rolling basis, with non-emergent, elective healthcare providers often permitted to open earlier than most other businesses. Even with this flexibility, things will be different than business as usual. Many states and localities require consumers and patients to wear masks, limit gathering sizes, and require clinicians to consider the nature of medical conditions before proceeding with an elective procedure. Private equity sponsors need to carefully monitor their platforms’ local orders, including those described in McGuireWoods’ state governors’ stay-at-home and elective procedure orders to understand what limits continue. Platforms should also monitor how other local businesses reopen to gauge patients’ comfort as their communities take steps to return. Where patients are not ready to return, platforms will want to minimize operational costs that may not have corresponding revenue.

2. Return of the platform’s labor force. Platforms need to return employees to work appropriately. Furloughed employees and staff with reduced hours during the pandemic can return to work in the same manner as the platform on-boards individuals returning from unpaid leave. By contrast, platforms may need to take additional steps for employees who were laid off (as opposed to furloughed). Generally, employers should treat such employees as newly hired employees under federal and state labor law (although, employee benefit plans will dictate whether such employees receive past service credit). Practices in jurisdictions with paid sick leave ordinances may also need to credit laid-off employees with any accrued but unused sick leave. This treatment for laid-off employees means platforms should prepare new I-9 forms, allow tax withholding and benefit selection, and receive other typical on-boarding paperwork for these “newly” hired employees. In addition, platforms need to provide standard new-employee training, including on HIPAA and fraud, waste and abuse compliance. Finally, healthcare platforms often have employment agreements with physicians and other clinical employees, which should be reviewed and amended if changed circumstances, prior to or following the return to work, necessitate modifications.

3. Consider “soft” reopenings while maintaining social distancing. As platforms reopen their doors, patient volumes may be less than before the pandemic. Accordingly, sponsors may want to encourage their platforms to schedule fewer patients per timeslot, and spread patients across the schedule. Some platforms may stay open for longer hours or for more days per week to better spread patients across the schedule. Platforms will also want to shift/rotate staff schedules, where possible, to reduce employees in the space at one time. Such an approach may help support employees as they manage additional responsibilities at home. For positions and employees who have successfully transitioned to telework, consider continuing this offsite labor to increase social distancing. CMS guidance suggests maximum use of all telehealth modalities through phase one of reopening. Patient distancing has negative revenue impacts, but may present opportunities for some specialties. Clinical staff could use extra time to discuss patients’ concerns and share common stay-at-home experiences. Prior to patient visits, when calling to reschedule appointments, staff can reach out to potential patients, providing education and explaining the platform’s response to the COVID-19 pandemic. Relational development during this period could enhance the platform’s long-term results.

4. Protect your workforce. A healthcare business’ most valuable asset is its trained workforce and plans to reopen should place employees’ safety and wellness as a paramount concern. Platforms should review the Centers for Disease Control and Prevention (CDC) guidance for healthcare facilities, along with CDC’s social distancing guidance. These workforce plans should also consider employees who may not be ready to return to work because they or their family members are medically vulnerable and may be in self-isolation, or they face additional caretaking responsibilities for elderly parents or children whose schools or daycares closed. Strong planning could build employee goodwill and engagement for years to come.

From a legal perspective, the Occupational Safety and Health Administration (OSHA) has asked employers to develop COVID-19 response plans, and will expect employers to have them in place before employees return to the workplace. Similarly, OSHA may fine employers that do not follow the CDC’s hygiene protocols. Finally, lawsuits could be brought against employers that fail to follow the applicable “standard of care” required for their employees, including OSHA and CDC guidelines. As such, platforms should develop strong cleaning regimens and provide staff personal protective equipment (PPE) appropriate for their roles, in addition to staff transition plans, discussed in No. 3 above.

5. Protect your patients. Platforms may also need to reconsider standard operating procedures to protect patients and staff. Many providers that remained open during the pandemic requested patients notify staff prior to arrival with any COVID-19-related symptoms. Platforms will want to examine if they can add space to their waiting rooms, consider automobile waiting options, and engineer protective barriers to slow virus spread. Some providers take all staff and patient temperatures with no-touch infrared thermometers before entering general areas, and segregate those with fevers. Platforms may utilize pre-visit phone calls to strengthen patient relationships and provide education, including ways to minimize COVID-19 risks during the patient visit. Platforms could collect necessary insurance and credit card information prior to the visit without exchanging physical copies at the front desk, which also may strengthen the platform’s revenue cycle management efforts. Patient portals allow patients to provide medical histories and consent forms, which historically have been difficult to secure pre-visit, but this pandemic could shift patient behavior. As mentioned above, providers should also continue utilizing telehealth visits for appropriate patients to reduce virus spread during this transition period. As discussed in prior McGuireWoods legal alerts, the government has taken significant action to expand access to telehealth during the pandemic.

6. Obtain COVID-19-related patient consents. Platforms may seek to limit malpractice liability by obtaining patient consents to acknowledge the potential risks from contracting COVID-19. Such consents can be added to existing consent forms. Patients would acknowledge that:

• visiting the medical office could lead to COVID-19 exposure;
• CMS and, if applicable, the state have encouraged delaying non-emergent care; and
• they have been advised of the risks and benefits of postponing the service or the procedure.

Malpractice carriers have standard forms, which can supplement platform-specific forms. Platforms should also encourage their clinicians to discuss these risks and benefits with patients, documenting the same in their medical records. As a best practice, obtaining a consent before the patient arrives at the office, which could be included in any pre-visit patient forms discussed above, may provide additional liability protections.

7. Continued financing/liquidity considerations. Sponsors should continue to monitor whether their platforms have necessary short-term capital available and, if not, utilize credit lines before depleting cash reserves. The federal government has provided significant support, including $50 billion in grants for all Medicare-enrolled providers discussed in a series of recent McGuireWoods alerts and the focus of a webinar this week, along with other funding including targeted grants for certain providers. Platforms are approaching reporting first-quarter financial status deadlines to their lenders (approximately 45 to 60 days after the end of the quarter), which may include negative impacts from the start of the COVID-19 pandemic. Sponsors should review their loan covenants and, if necessary, begin or continue discussions with their lenders to determine if the parties can leverage broad-based relationships to address financial covenants proactively. In addition, lenders continue to fund revolver draws, and we continue to see funding for transaction debt, albeit with more scrutiny. Nontraditional lenders may also lend into the crisis if a platform needs funds while not qualifying for a more traditional bank’s underwriting.

8. Distressed investing. Many expect to see a decline in healthcare-sector transactions for several months due to the economic decline resulting from the COVID-19 pandemic until practices have re-established pre-shutdown run rates. This could make it difficult in the short term to execute on any growth-by-acquisition model. On the other hand, the economic environment could create new opportunities. Smaller practices have limited opportunities to obtain financing absent a transaction and may not navigate the pandemic’s significant challenges. Some providers will likely undertake out-of-court and formal bankruptcy processes, look to exit investments, or seek out a financial partner to continue to serve their community. Sponsors and platforms could seize these opportunities to execute on tuck-in or add-on transactions, or to acquire assets through the distressed investing market, at reduced prices. Sponsors and platforms examining distressed investment should prepare for different, scaled down due diligence, engage in a shorter process to find the right partner, and rework their existing systems to accommodate this type of acquisition. McGuireWoods has featured two Across the Table podcast episodes on these topics. Furthermore, sponsors and platforms may need to be creative on pricing distressed assets or even traditional add-on opportunities as the COVID-19 pandemic presents challenges to historic financial valuation methods (e.g., trailing EBITDA) and contingent payment mechanisms often have regulatory constraints in the healthcare sector.

9. Plans for a second COVID-19 closure. While planning for a downside possibility while generating positive excitement generated from reopening is not ideal, sponsors should insist that their platforms prepare for a potential second COVID-19-related closure. Experts, including members of the Trump administration, have stated a second wave of COVID-19 illness is inevitable. If a second wave causes new stay-at-home orders, platforms could find a second closure harder than the first. Americans appear fatigued with quarantines/social distancing and many expended their financial cushions or joined their state’s unemployment rolls. Platforms similarly reduced inventories and used credit lines. Staff goodwill may have been exhausted through this period. Platforms need to monitor overhead costs carefully, and may need to take further cost-cutting measures to ensure financial liquidity to support the business. Few can predict how a second wave of closures will affect the wider community. Nonetheless, proactive planning could ease the difficulties in returning to a closure period. Sponsors will want to discuss with platform leadership lessons learned from this period. Incorporating these lessons could improve results during a second closure and, for Medicare facilities, could address certain training and testing elements required by Medicare emergency preparedness plan regulations.

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Please contact the authors for additional guidance on how private equity platforms with healthcare investments are responding to the COVID-19 pandemic and planning to reopen their facilities. McGuireWoods has been advising sponsors throughout the COVID-19 crisis, including guidance as the pandemic closed business (see, e.g., March 19 and March 27) and on financial support for healthcare providers (see, e.g., April 24 and April 27).

McGuireWoods has published additional thought leadership related to how companies across industries can address crucial COVID-19-related business and legal issues. We anticipate further developments in the days and weeks to come, and we stand ready to work with you on the challenges you face.