Long-term care facilities continue to be battered by a barrage of financial challenges, and there seems to be no end in sight. Most recently and at the forefront in today’s news is the impact of the proposed health care reform on long-term care facilities. In the best-case scenario, long-term care facilities are facing further reductions in cost-of-living increases after receiving a pittance of the federal bailout funds given to states for funding Medicare. This is just more bad news for an industry that is still struggling to compensate for a yearly 3.3 percent reduction in Medicare rates beginning in 2008 that will result in direct cuts of at least $16 billion over the next decade.
As a result of current financial challenges, access to capital has become vital to the survival of long-term care facilities. To be sure, long-term care facilities that were effective cost managers prior to and throughout the economic crisis can still gain access to capital, but must do more to obtain financing than they have ever done before. First, successful borrowers must be willing to undergo greater scrutiny from lenders. Second, successful borrowers must be ready to wait, as the process for obtaining financing is likely to take longer than in the past. Third, successful borrowers must be prepared to offer more equity for access to funds and accept less-favorable terms compared to previous financings (today the norm for most companies is only leverage 50-70 percent compared to a few years ago, when 80-90 percent leverage was the norm). Fourth, successful borrowers should proactively familiarize themselves with each lender’s new policies and procedures that have been instituted in recent months before approaching them. Finally, successful borrowers usually have predictable cash flow, strong accounts-receivable turnover and sound internal systems with solid operators. As lenders become more cautious, long-term care facilities that are able to meet these requirements are most likely to gain access to capital.
So where does that leave the remainder of long-term care facilities? Unfortunately for those facilities in weak financial condition, acquisition is often the only alternative to closure. This creates a unique opportunity for potential investors to make strategic acquisitions. The growth of long-term care facilities is assured as baby-boomers begin to enter into retirement, and there is a potential for profit to be made by turning around distressed facilities. However, because some sectors of the industry are heavily regulated and federal funding remains a significant source of income, acquisition of long-term care facilities must be strategic to be profitable. In determining the future value of a distressed facility, potential purchasers should evaluate facilities primarily on location, past and potential cash flow, and whether an experienced operator can take over the facility—the same criteria lenders consider when providing capital to healthy long-term care facilities. Location is likely to be a key consideration as it is one of the few aspects of a facility that cannot easily be altered post-acquisition. In addition, potential investors must also consider whether purchasing a long-term care facility through bankruptcy might also increase the value of the acquisition by limiting successor liability.
It is likely that the next few years will continue to be challenging for long-term care facilities as they struggle with ever-decreasing governmental funding in such a heavily regulated industry. However, there is also a window of opportunity to acquire and create financially-sustainable long-term care facilities in a market that is destined to grow.