Pandemic Creates Pain for Private Equity-Backed Healthcare Deals

Pandemic Creates Pain for Private Equity-Backed Healthcare Deals

There’s no question that the Covid-19 pandemic has had a drastic and significant impact on the healthcare sector, with each subsector and geographic region feeling its own unique pain.

Healthcare workers and first responders around the nation have stepped up to help those suffering from the coronavirus. One major aspect of this effort has been the emergency and acute care delivery system mobilizing to address COVID-19. All non-essential and elective surgeries and procedures have been postponed to devote as many resources as possible to the pandemic. Without a doubt, the pandemic and its aftershocks will affect M&A activity for the foreseeable future.

Type of Care Determines Effects on Business

As the economic effects of the novel coronavirus pandemic are examined, many have chosen to view the future in the long and short-term. The limitations of our economic activity, the prospect for containing the virus, and the ability for states to sound the “all clear” will dramatically drive subsequent efforts and their effects. These impacts will vary greatly depending upon the healthcare industry’s sub-sectors, which can be categorized into three groups: emergency, essential non-emergency, and elective care.

Of course, the need for emergency care has intensified with the rush of patients who need Covid-19 testing and treatment. The supply costs for PPE have risen dramatically, and healthcare companies are identifying costs and lost revenue directly related to Covid-19 and are working with lenders to recognize these as addbacks or non-recurring expenses for covenant and reporting purposes.

At the beginning of the pandemic, Medicare and the CDC recommended that non-essential healthcare be delayed so that employees medical supplies, hospital beds, and other vital resources could be provided directly to the front lines of the virus fight. As a result, there will be a backlog of essential non-emergency care.

Medicare has set out protocols to help with decision-making on what care should be provided during the pandemic; however, the program has permitted healthcare clinicians flexibility in their plans. Observers believe that the backlog of essential non-emergency care will begin to unwind in the near future, creating additional demand on the healthcare system. This is because of the fact that there are important, and in some cases, life-saving procedures that must be provided in concert with caring for those struck by the virus.

Healthcare businesses that provide only or primarily elective procedures are experiencing adverse effects, and there is a lot of uncertainty as to when elective based healthcare will return. Primary care, family medicine, podiatry, dermatology, and dentistry, among other specialties, have all been hit with reduced volumes because all routine and elective care is postponed.

The legislation that has been passed to help the economy in the pandemic has not included help for healthcare services, although there are some specific measures being discussed. In the long-term, the demand for elective care shouldn’t change, but its delivery system will likely evolve with telemedicine and other remote care initiatives that are now in greater use. Many providers are discussing revising their schedules through the summer and beyond to accommodate an influx of patients when they are given the okay to reopen. Some have even considered having office hours Monday through Saturday to meet the demand.

Healthcare generally is seen as a resilient sector, and analysists do not anticipate any systemic demand shocks to persist in most healthcare services. That said, it is also easy to say that the longer the restrictions are in effect, the greater the uncertainty of the future.

Short-Term Pandemic Impacts on M&A

The short-term effects on M&A have been widely published, and while many healthcare deals with an imminent close are moving to completion on extended schedules, there may be holdback structures to accommodate virus-related uncertainty. Others transactions that were earlier in the process have been paused or scrapped on a case-by-case basis.

Lenders will be a major driver of M&A activity and valuations in the long-term. If the virus is contained relatively quickly and economic activity normalizes this summer, lenders may be able to rebound at a fairly fast pace. With the heightened risk of the macroeconomic outlook, interest rates are expected to increase and underwriting will become more conservative.

Currently, lenders are mostly saying they are “open for business,” but traditional bank financing has been in a near total retreat. Experts believe that some unitranche lenders to be more aggressive in this market with higher costs given the risk. If there is a more prolonged economic contraction, lenders will get more cautious, and valuations will likely fall.

Creative deal structuring will also probably help deal-making in the pandemic, and there may be more seller financing and use of holdbacks to accommodate potential restrictions within the lender community and the Covid-19 related financial decline. These instruments will have significant interplay with overall deal valuations.

Healthcare companies looking to deal will have challenges managing and explaining their business during the pandemic, and the financial performance for most healthcare businesses will be impacted on some level depending on the sector. Those that are driven by elective procedures will have a considerable dip from historical results. Plus, the payor mix for healthcare businesses will likely shift with increases in unemployment. Trended and historical data may not be as useful and, as a result, creating a meaningful business narrative could be difficult.

Experts say that healthcare companies will benefit from detailed monitoring of Covid-19-related expenses as they expect an industry standard will be developed around addbacks for these unexpected costs. Whether for a transaction, a loan or general good financial record-keeping, these entities will need to provide exact details to explain the business implications of the pandemic. The more forward-facing and meticulous they can be about explaining their COVID-19 expenses in contrast to normal operating costs, the better they will be.

There will also likely be healthcare companies that falter in this environment, and the M&A activity will likely focus on these businesses to present fast-tracked sale or investment opportunities.


Today’s “new normal” really isn’t “normal.”

The uncertainties of the coronavirus and how it will impact the healthcare industry will continue to play a major role in M&A activity both in the short and long-term.