The continuing implementation of the Affordable Care Act will throw the healthcare industry into short-term chaos. In fact, Senator Bill Frist predicted at the 2014 regional conference of the National Investment Center for the Seniors Housing & Care Industry that 1,000 of the nation's 5,000 hospitals will go out of business in the next eight years. It is imperative that healthcare lenders take a critical look at every asset in their portfolios to consider the implications that the Affordable Care Act will have on their customers.

Healthcare lenders must be astute and proactive in asking the right questions to identify potential default situations early on. Key ACA provisions will result in increased reimbursement, litigation and operation risks that dramatically change the marketplace. The ACA could create an opportunity for healthcare providers — including hospitals, post-acute care and hospice care centers — to solidify operational health and positioning. However, the dramatic headwinds will result in increasing defaults and bankruptcy for many operators in the healthcare space.

Lenders should be ready to dig into their healthcare portfolios to evaluate their assets based on several key factors.

The patient-centered care model of the future is built on streamlining care by moving patients to lower-cost settings involving lessened care requirements for recovery.This will result in shorter occupancy at hospitals, with a resulting shift to treatment provided in post-acute care settings. Healthcare lenders must know what their borrowers are doing to react to this shift in the length of stay and the type of patients they will primarily be serving. By way of example, an assisted living facility that historically has focused on extended-stay residents may shift its focus to provide intermediate rehabilitation care with a goal of moving the patient out in a shorter period of time. This will drive the need for operators to partner with other care providers to fill their niche along the care continuum of moving patients from hospitals and back to their individual homes. If the borrower is not coordinating care by joining an accountable care organization, it should at least be running in parallel with them or loosely affiliating with entities along the care continuum.

Healthcare today and in the future demands a fully integrated data-driven organization. The unprecedented innovation and change in the provision of healthcare services has made data gathering, reporting and analysis the key differentiator for healthcare providers seeking to remain relevant in the ACA universe. Lenders should keep an eye on whether their borrowers are building their technology infrastructure and network and examine how they intend to pay for it.

Business as usual is no longer feasible for health care providers, due to the changing reimbursement structure, the increased healthcare record platforms necessary to compete and the changing length of stays and type of patient for which operators may care. The Centers for Medicare and Medicaid Services is offering funding grants to reward organizations that are implementing the most transformative new ideas to deliver healthcare. Lenders should examine the innovative steps their borrowers are taking to prepare for the sentinel shift in care under the ACA. 

The pendulum on new construction in the healthcare industry has swung back to aggressive growth. This opens up big opportunities for healthcare lenders to make new construction loans — but they must understand their borrowers’ plans for capital expenditures, infrastructure to support maintenance and how they will address the increased building renovations needed to improve the life and safety of all residents.

Healthcare lenders should also ensure that they know what each of their borrowers is doing to train staff, develop leaders and increase clinical competencies. This marketplace reality requires providers to excel in these areas in order to compete. Do they have dedicated care managers, centralized intake and patient placement, joint quality committees with network partners, active physician involvement, leadership skills training and technology interoperability?

Finally, lenders should prepare for the fact that there will be widespread industry consolidation in the post-ACA world. Owners of individual, small or medium-sized healthcare providers have less financial leeway because of tightening profit margins. Scale will be an advantage in the healthcare industry of the future, and borrowers should be prepared.

Seismic shifts in the healthcare industry are being caused by uncertain reimbursement rates, increased cost to build technology infrastructures, shorter length of patient stays, increased competition through aggressive construction, limited partnering opportunities along the care continuum, and increased consumer expectation and demand. Healthcare lenders must understand these industry drivers and identify the borrowers who are not responding. Failure to heed this wake-up call now will put healthcare portfolios in peril in the near future.

Timothy M. Lupinacci is chair of the financial institutions group at the law firm of Baker Donelson, where he concentrates his practice in the areas of bankruptcy and restructuring, financial services and transactions and health law. Mr. Lupinacci primarily represents special servicers, indenture trustees, banks, financial institutions and asset-based lenders in loan workouts and insolvency, with an emphasis on creative restructuring of problem loans, including long-term care and senior housing defaults.