MICHAEL COILEY OF CIT CORPORATE
FINANCE, HEALTHCARE, DISCUSSES
SOME OF THE AREAS THAT YOU
SHOULD CONSIDER AS YOU EVALU-
ATE THE HEALTHCARE SECTOR AND
THE CHALLENGES THAT EXIST IN
LENDING TO THIS SECTOR.
There is not a day that goes by without some news about healthcare,
whether it’s modifications to the
Affordable Care Act (ACA), a shifting
and consolidating market of service
providers or altering the “fee for
service” model, among other topics.
Healthcare accounts for 18% of GDP
(projected to increase to 20% by 2022)
and, as such, represents a growing
sector of the economy and should
also signify an expanding loan market
during this period.
While we are all individual “users”
of healthcare, do we understand it
enough to deploy capital in the form
of senior secured loans? As asset-based lenders, do we really appreciate the risk that we are being asked
to take by lending into this sector?
This brief article using the “Five Cs
of Credit” outlines some of the areas
that you should consider as you
evaluate the healthcare sector and
some of the challenges that exist in
lending to this sector.
Capacity: Like most specialized
sectors, healthcare has an abundance
of acronyms and terms that are
utilized in each sub-sector, such as
“ADC,” “PPD,” “RUGs,” “CON,” “ALOS”
and “case mix,” among others. Do you
understand the impact these items
have on the financial statements?
Can you “speak” the same language as
your borrower in the critical diligence
phases as you evaluate the sufficiency
of their cash flows? If you are transacting with a business that relies on
payments from Medicare/Medicaid, do
you understand the impact of sequestration and do you have a view on the
potential for future reimbursement
rate reductions or regulatory changes?
Do you have a process to follow the
recommendations of the Medicare
Payment Advisory Commission (“
MedPAC”), an independent agency that
advises the U.S. Congress on issues
affecting the Medicare program whose
recommendations may provide a basis
for assumptions in your financial
Capital: Corporate structures in