There are those who think this will all shake out for the better and that not only will entrepreneurial healthcare still exist, but that it may flourish. Others think doomsday is coming and that we all might as well be living in Canada, the United Kingdom or somewhere else that already has rationed healthcare, as well as long waits for what we consider routine diagnostic and treatment services. And still there are others who know things are not so good, but they think that it really doesn’t apply to them. These are the folks to whom I want to address this article. (In case you are wondering, I am in the first camp, as I think our entrepreneurial spirit will flourish.)
I have recently been asked more than once if I could arrange for non-recourse debt financing (defined as no personal guaranties) for start-up outpatient centers. The type of center does not really matter too much, except that hardly anyone is creating new diagnostic imaging centers these days because of the impact of the Deficit Reduction Act of 2005 (the DRA has recently been reported to have saved Medicare $1.7 billion since its inception), so that leaves surgery centers and oncology centers. Based upon these queries, I contacted many of the key lenders that are still standing after a run of consolidations, mergers, acquisitions, layoffs, shutdowns and other financial disasters, lead notably by the sub-prime housing market mess. Besides a series of giggles, the responses I received after asking if non-recourse financing was available from these lenders included:
“Are you kidding?”
“Don’t you read the newspapers or watch TV news reports?
“No.”
“Perhaps equipment only, if there is a strong bond-rated hospital involved and 35 percent or more equity being contributed by the partners.”
And definitely “no” to start-up working capital lending and borrowing to cover leasehold improvement expenses.
Suffice it to say, finding non-recourse financing for start-up outpatient centers is clearly very difficult to find at this juncture, and virtually impossible if there is no hospital involved. The aforementioned comment is the most telling, in that it talks about a bond-rated hospital being a partner and raising more equity among the owners from the standard of 20 percent or 25 percent to a new minimum standard of 30 percent to 35 percent, or even more of the total project cost. And let’s not forget that there will be (and already has been) a jump in interest rates not because the indexes are higher, but because the lenders need to make greater margins in order to survive.
This is a difficult period, but one that can be weathered. Quite frankly, it is one that must be weathered. The good news is, that’s what we are all about; regardless of political affiliations and political leanings, we as Americans weather storms. We adapt, we come up with new strategies, we bite the bullet, we stretch, we do things that no others can do and we make it happen.
If your project structures and financing deal structures are going to have to be different from before, or the way they used to be or what you are used to having them be, then so be it. Keep in mind that things are very different right now and nowhere near what they used to be. Change your strategies if you have to. Make additions to your ownership complement if that make sense to you. Hold off on the project if you must. Make the people you work with understand that there needs to be a mindset change. And if you do that, then maybe you too can weather this storm. Do what you have to do; don’t sit back and don’t assume that someone else is going to take care of it for you. Trust your friends and business colleagues whom you have been able to trust in the past. We are all in the same boat and most of us know how to paddle; let’s hope we are all paddling in the same direction and that we don’t have to rely too much on swimming.
I hope you are not taking this as a “doom and gloom” message, because it is not intended to be. It’s a reality check about some things I am intimately familiar with and thought it best to share my thoughts among friends, business colleagues and others.
Robert S. Goodman, of The Mansfield Group, LLC, has worked extensively in surgery center financing as well as turnarounds, restructurings and re-syndications. Goodman has more than 35 years of healthcare experience in hospital administration, investment banking, financing and consulting.