By Walt Cartin
South Carolina’s health sector mergers and acquisitions were halted in March, as well as almost everything else, because of the coronavirus pandemic. Although the freeze has eased, the pandemic has created new difficulties in the way business is done. It can also lead to an increase in transactions involving rural hospitals, doctor’s offices and acquisitions across the state.
Many health asset buyers are back in business with an important caveat: they are now pushing for contract terms that provide specific safeguards related to Covid-19. With qualified nursing or other facilities that cater to vulnerable populations, buyers want to preserve the right to terminate the business at any time before closing if there is an outbreak at the facility. Some also wanted the vendor to certify compliance with Covid-19 specific Centers for Disease Control and Prevention guidelines, whereas this would traditionally have been collected in terms of general compliance earlier.
Several large, sophisticated vendors have agreed to the specific terms of the CDC. But they stayed in their most traditional terms, essentially saying, ‘Take it or leave it’. Some smaller health operations, in dire need of cash flow, were more flexible. The use of new contract terms really came down to how badly the seller wants to consummate the deal.
There are two areas in particular where more business can happen: rural hospitals and doctors’ offices. Covid-19 caused more acute problems for rural hospitals that were not doing well before. Federal funding through the Coronavirus Aid, Aid and Economic Security Act (CARES) helped to mitigate some losses. But as the pandemic continues, it will worsen what was already a challenging environment in many rural areas. While there are not many remaining rural hospitals in South Carolina that are not affiliated, as far as further consolidation is possible, we will likely see it. In addition, major health systems in South Carolina may seek to buy rural hospitals outside the state to expand their presence in new markets.
The pandemic has also created conditions for an increase in the number of hospitals seeking medical practices. Certain medical offices and other outpatient facilities – especially those that generate most of their income based on elective procedures – have had to completely shut down all non-emergency care. As a result, these providers experienced significant cash flow disruptions. Some who have remained independent are now showing more interest in being employed in hospitals because of the income safety net that hospitals can offer. However, as with rural hospitals, medical office acquisitions will be stifled by the fact that there are not many large independent offices to acquire in South Carolina. This is another area where the state’s larger systems can look beyond borders. .
International transactions can take both directions. Some healthcare systems in North Carolina, Georgia and other states may also consider opportunities here. They will likely focus on more profitable markets in South Carolina, with a significant population and a good mix of payers. (For example, markets with a higher concentration of patients with private insurance are generally more profitable).
The end result is that mergers and acquisitions in the healthcare sector are returning to normal, with some caveats specific to the coronavirus. It can be valuable to partner with an outside attorney to assess potential opportunities confidentially and analyze potential risk mitigation strategies. Experienced lawyers can also help buyers and sellers navigate a due diligence process that has become more challenging due to social detachment and unpredictable cash flow.
Walt Cartin is a partner in Parker Poe’s Columbia office. He can be reached at [email protected].