December 30, 2019

This article originally appeared in Physicians Practice

Carolyn Johnsen, JD, and Timothy Gary, JD

Perhaps one thing we can agree on in discussing the health care industry: it is in a state of distress stemming from the challenges created by an ever-increasing regulatory burden, changes in reimbursement rates, uncertainty with the Affordable Care Act, and mounting tort and employment litigation. The recent growth of urgent care centers and retail clinics as well as technological advances and telemedicine has changed the nature of healthcare services. Consequently, these changes have put greater pressure on providers to compete and have altered the economics of health care delivery.

Since the passage of the Affordable Care Act in 2010, health care providers such as hospitals (large, small, rural, profit or non-profit), ambulatory surgical centers and skilled nursing facilities have suffered increasing strain to alter their business models to conform to the new realities of doing business. Operators have found themselves unable to deal with the cacophony of adjustments related to reimbursement, regulatory oversight, and additional capital requirements that have occurred simultaneously. The result has been a wave of consolidations, and in many cases failures, of smaller and some larger groups. Hospitals, both small standalone facilities, as well as larger systems find themselves looking at bankruptcy. The fact is that you cannot cut your way to prosperity.

This new reality requires new solutions. Many troubled health care companies need to be reorganized, gain access to new capital sources, improve operations and shed old obligations that they can no longer support. This may sound familiar—but what is the fix?

It starts with the same approach that a health care provider would present to a patient:

Detection/Diagnosis: Early detection and the path to ultimate stability and profitability requires a deep dive into the provider’s revenue cycle, its technology platform and its labor force. For example, is the issue one of reduced reimbursements or is it really one of omitting proper billing for certain procedures or devices resulting in a large loss of revenue. Is the issue one of perceived management failures or is it really one of a cumbersome corporate or affiliate or legacy structure. Is the issue one of higher costs or is it really a failure to take advantage of consolidating expenses. Finally, is the issue one of unmanageable regulatory compliance or is it a situation that can be isolated and addressed without jeopardizing on-going operations.

Devising a Treatment Strategy: Strategy without actionable supporting data is just an opinion – not a solution. Only after analysis and pin-pointing the true and critical issues can a treatment be formulated. The foregoing examples illustrate that every situation, just like every patient, is different. Today’s health care playing field consists of a myriad of scenarios and combinations: for example: i) small hospitals are capital constrained; ii) big hospitals want to become small; iii) physicians want to be employees; iv) physician groups want to grow in specialty spaces. The options involve exploring not just one avenue, but rather a focused combination of business and legal tools to accomplish sustainability and profitability.

Course of Treatment Example:

Clearly, as demonstrated by the recent spate of bankruptcy filings across the country, one of the most important business tools in today’s world is bankruptcy restructurings.

In years past, the bankruptcy option was tagged as the remedy of last resort. But, now, bankruptcy means opportunity. It can provide the necessary forum and mechanisms to resolve structure and legacy issues, solve capital requirements, enhance financial stability and maximize value.

In a more modern view, bankruptcy should be considered a business means to use in revitalizing, restructuring, and accomplishing the goals management foresees or needs to anticipate. This may include effectuating a merger, a sale/purchase of assets or equity, a way to deal with regulatory issues and cumbersome leases or contracts, or what might be a straight-up restructure of debt and equity with new capital. In any case, the bankruptcy process can provide a safe haven from which a company can emerge with a clean balance sheet – the proverbial clean bill of health.

Selecting the Right Professionals: As with selecting the right physician for any medical procedure, the same is true for resolving a health care provider’s distressed business malady. Whether an organization is doing well, or underperforming, there are significant opportunities in this uncertain time. Assembling a team of skilled legal, accounting and operational advisors is necessary to surviving and thriving in the changing health care industry. Now is the time to develop strategies to maximize opportunities and goals, whether the concern is about financial sustainability, or about seeking opportunities to expand operations through acquisition of distressed entities.

For the unprepared, the mantra from the television series Game of Thrones, “winter is coming” may apply. But, planning for the change is planning for success.

Carolyn J. Johnsen, JD, is a Member Partner at Dickinson Wright PLLC and focuses her practice on the healthcare industry. Her experience includes creating complex plans of reorganization for multi-million dollar companies.

C. Timothy Gary, JD, is a nationally-recognized healthcare and governmental relations executive. His previous positions include assistant attorney general for the state of Tennessee, VP & GC for Volunteer State Health Plan, one of the first managed Medicaid MCOs in the United States, and SVP / COO for a national health and wellness company.

Carolyn and Tim are founding members of the firm’s Distressed Health Care Restructuring Group (“DHR”), which combines the experience of its health care and restructuring/bankruptcy attorneys to advise clients on how to address challenges resulting from this changing health care environment and the most efficient ways to achieve and maintain ongoing financial viability.