April 1, 2020

Waiting Room: When Doctor’s Offices Face the Coronavirus

This episode of Point By Point was produced prior to the combination of Waller and Holland & Knight.

Welcome to a new episode of PointByPoint.

Conversations, interviews and legal commentary for today's business professionals. 

We've heard the many challenges that hospitals are facing in the battle against the coronavirus, but what about physician practices, dentists and other providers who’ve seen their business come to a halt? Today, Waller’s Lance Williams talks with Eric Scalzo about the needs of these providers, along with a discussion of the future of M&A in that sector.


Lance: Eric, thank you so much for joining us. I guess the first question right out the gate is what are some of the biggest questions you're hearing from clients and business owners you're talking to right now?

Eric: Yeah, Lance. So it's Friday, March 27. If you asked that question a week ago, I would have said, you know, what happens when one of my providers, one of my employees, tests positive for COVID-19? Or what happens if a patient who we saw a couple days ago calls us and says that they have tested positive? I think we've worked through with most of our clients the operational issues. The second wave of issues were then government orders rolling out through various states in terms of essential businesses and am I an essential business? Do I have to remain open, or can I remain open? And now things are pivoting to the CARES Act, which was passed, and what are the benefits under the CARES Act, and how can I take advantage of some of the relief legislation and relief packages, stimulus packages that are in there? Particularly around the SBA loans and applicability for employers who employ 500 or fewer employees, and how do you distinguish amongst, particularly in the healthcare space and in the MSO and DSO space, how do you distinguish between management company, non clinical personnel and the natural practices, and clinical personnel? And what does that mean for the analysis in terms of do I have more than or fewer than 500 individuals in my employment.

Lance: And it sounds like that's a big distinguishing factor if you look at Families First and some of the things that it provides for employees. But then you also that CARES Act. There's a difference there. There's a bit of a dividing line in terms of the number of employees and which companies were covered by which act and which law. Can you help us kind of walk through how companies are looking at that and trying to figure out, does this apply to me? Does this not help us? Can understand, you know, who's covered where and what companies need to be looking at terms of which part of the line they fall on.

Eric: Yeah, I don't think, as much as people joke about, you know, the intelligence in Washington, I don't think that they mistakenly chose 500 as the number for both bills. The whole goal of the incentive packages, lumping them together, was to keep Americans employed, receiving paychecks, hopefully off unemployment. Although, if they are unemployed under the CARES Act, there is increased benefit at this point, but to allow them to continue to make their rent payments and their car payments and so that the whole economic engine of the United States doesn't grind to a halt. And so the Families First Act, you know, the idea was, if you have fewer than 500 employees, you're mandated to provide a certain amount of paid leave. You turn around and under the CARES Act, if you have fewer than 500 employees, you're allowed to access SBA loans that have, in my opinion, fairly favorable terms, right? 4 percent. And you can get up to a multiple on your average monthly expenses. Really, its payroll, rent, expenses and interest and debt expenses that you've incurred over the past year. And so it allows you to kind of offset right, the other one. And they want you to keep folks employed, and they've got a burden tied to that in the form of the Families First Act. And then they turn around and allow you to get benefit of the CARES Act, if you meet certain criteria, through the small business loan. And so I think the two interplay well together, and hopefully we'll achieve what Congress wanted them to. But the questions that we're getting now from folks are really around, as I said earlier, the question of who is the employer and how many employees report to that employer for affiliation purposes under the CARES Act, and can they qualify for the SBA loan.

Lance: So talk to us a little bit about, when you're talking with employers, what are some of the biggest challenges that they're thinking about maybe over the next 30 to 60 days. What are some of the challenges that they're really kind of wrestling with right now?

Eric: Yeah, there's a difference between liquidity and solvency, right? And I think for a number of clients there's not a going concern issue for them in terms of solvency and whether or not they have the ability to, as a business, remain in operation. They do have a potential liquidity problem here, though, especially the smaller practices of the group practices, that really live off of, you know, 70 or 80 percent of their AR is collected within the first 30 days. Well, you know, we're running up pretty close to, pretty quickly on, a 30 day window, and after that, really no money is going to be coming in. And so it's how do the companies survive once their revenue dips down through no fault of really anybody, right, due to the government order or through the natural progression of people not going to see their providers, or going to certain companies to spend their money. So I think the CARES Act is gonna provide, hopefully, kind of the blowout valve for the folks that are running up against that liquidity crunch in terms of how they can keep paying rent, keep paying the landlord, keep paying their employees and their employee benefits expenses and really bridge over to what will hopefully be a quick turnaround and the V shaped recovery that everybody is looking for, but will hopefully bridge them across these troubled times.

Lance: Gotcha. And you look at so many providers that currently aren't seeing a regular patient load or having folks come through the door. Let’s say that, you know, something has lifted in two weeks or three weeks. What are some concerns they need to think about in terms of getting back to normal or trying to get back to normal? What are some things that they need to be thinking about in terms of ramping back up?

Eric: It's not just 'Are they going be able to really unlock the door and let patients come in,' you know, in certain jurisdictions they're not allowed to now, will they be able to in two weeks or three weeks? I don't know. But it's more about, will the patients come at that point, right? If you are largely elective procedures, maybe more in the cosmetic world or the vanity world, are patients going to come to a medical setting and risk being exposed, whatever the risk is in your particular jurisdiction and geography for that elective procedure. If something is borderline elective, where are patients going to draw the line and actually come out of their homes? I do think that when the all clear sound, whatever that sounds like or looks like is given, I think that people want to get out and want to spend money and go back, you know, to restaurants and plays. But I just think if it's in the next couple of weeks, there's going to be a lot of hesitancy to get back in large groups or get back in public businesses where you may be sitting in a waiting room with other folks. And so I think, thinking through the things that you could do to assure the patients that your waiting room, your exam rooms, are safe and sterile, and you've taken on additional procedures to help to continue to flatten the curve. It's not just going to get shut off. We're gonna be dealing with this for some months in the future. So I think assuring patients that you're addressing it appropriately is one thing that folks need to do.

Lance: So much has been happening in the last couple of weeks. There've been so many questions related to operational things. How do you think businesses are going to be able to make a shift from being reactive to thinking proactively about the future? What does that process look like and feel like, and at what point do you think business will be able to start shifting their thinking again.

Eric: So I think if you had asked us four weeks ago if we were going to be living in the scenario that we're living in now, in terms of, you know, most folks working from home and there being government orders around the country that shut down nonessential services, I think a lot of folks would have said that's an overreaction, but it's now a reality. And so I think the past week, week plus, people have been backpedaling, right, and put on their heels a little bit in terms of reacting to this, reacting to the patient that calls them up to say, hey, I was in your office three days ago and I was just diagnosed with COVID-19. Or the provider or providers calling you, just as you're about to open the doors, saying, hey, I know I was in yesterday and I interacted with all those people, I'm now showing symptoms, and reacting to what that means for the operations and for your obligations with the rest of your patients and your other employees. So everyone has been very much necessarily reacting to the scenario. I think we're gonna see, and I have seen, over the course of this week, business leaders pivoting from that reaction of putting out the fires that they can to, how do we address this in a proactive way? How do we kind of circle up the troops and determine the best path forward? And I think the passage of the CARES Act in conjunction with the Families First Act is going to allow some certainty for the business folks over this weekend to sit down and crunch the numbers and figure out what it means in terms of whether or not they are going to lay people off next week, whether or not they're gonna furlough folks or whether or not they're going to try to patch it together for the foreseeable future, given the opportunities under the CARES Act and FDA loans and whatnot.

Lance: Shifting gears a little bit, let's talk a little about the M&A landscape, and obviously it's probably different now than what we were hearing 30 days ago, but what are you hearing right now, and what do you think that happens to the pipeline over the next three months, six months?

Eric: Looking to run towards the fire and looking for opportunities in this kind of downturn in time of uncertainty, and I think there's gonna be a number of groups that maybe use this opportunity to throw up their hands and say, you know, I do want to sell and get out. And so I think we're gonna see certainly not the activity that we had IN the beginning of Q1, year 2020, we’re not going to see that continue over the next couple of weeks and months, but I do think that we're gonna see continued activity. We as a firm have been closing deals throughout all of this, and the number has gone down, and certainly a good number of the active deals have put pencils down. But again, I think over the past two weeks, week and a half, two weeks, people have been reacting and the immediate and I think smart reaction in the face of all this uncertainty is to say, let's just go pencils down right now and kind of get a feel for where things are. And I think as we get a sense for the duration and real impact of this, we're going to see a number of those deals pick back up. We're gonna see new allies get inked, and I think it is gonna pick up. The fact of the matter is there is still a whole lot of cash sitting on the sidelines, and some of it has probably been deployed over the past couple of weeks in ways that two or three weeks ago, nobody thought it would have been deployed. But there's still a lot of cash out there and a lot of folks looking to make acquisitions. So I think as we get certainty and clarity into kind of the impact of this on the economy and duration, I think we're gonna see things pick up again.

Lance: And it sounds like you think that there may be some providers that this may give them the opportunity to take a second look and decide do we want to stick with it, or do we want to look at potentially looking for suitors. Is that something you think we'll see more of, too?

Eric: Yeah. You know, I do a lot of my work in the large DSO space, and I think this is a perfect example of the benefits of being of affiliated with a large DSO who has the resources to work through Families First Act and CARES Act, they're not, you know, five page bills. They're massive bills with a lot of intricacies and interpreting them and applying them, and making sure you get the best benefits--that's not the job of, you know, the dentist with five or 10 or 15 offices who doesn't have the resources of some of these large groups. Nor should it be. So I think it just goes to prove that, you know, as businesses become more involved in various healthcare specialties and healthcare arenas, that the providers will see that maybe that's a viable alternative to going it alone. And so, yeah, I think that's right, but I also think it's an opportunity for those smaller groups to really entrench themselves and, you know, show their teams about their culture and how they can help their employee family and get through this tough time, too.

Lance: Thank you. Last question. You know, you talk about the folks sitting down this weekend really kind of crunching the numbers. Do you have any thoughts on either a key question or a key thought that they need to keep in mind when they're going through that process this weekend? Any kind of any advice that should kind of be a leading thought as they’re working through issues?

Eric: Yeah, we’re putting together some materials on this now, but the, particularly under the SBA loan, the concept of affiliation, historically certain groups have been excluded from SBA loans just because of their structure. But I think if you think through your structure and particularly around the MSO/DSO space where you have these independent practices, think about whether or not the SBA loan is an opportunity for you or your affiliated practices, and I’m using the term affiliated there in the traditional sense, not in the SBA sense, since I think parsing that out, a lot of folks should think about that instead of taking the initial reaction of SBA loans don’t apply to private equity groups or private equity platform companies. There may be some ways to work it in, so being thoughtful about that is gonna be really important going into the next week and crunching the numbers to see what your path forward looks like.

Lance: Great. Thank you so much. We appreciate you taking the time and best of luck in the weeks ahead.

Eric: Great. Thanks, everyone.

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