How the Pandemic Is Impacting Health Care Mergers, Acquisitions in South Carolina
By Walt Cartin
Mergers and acquisitions in South Carolina’s health care industry came to a grinding halt in March, as did just about everything else, because of the coronavirus pandemic. While that freeze has now thawed, the pandemic has created new wrinkles in how deals get done. It may also lead to an uptick in transactions involving rural hospitals, physician practices and acquisitions across state lines.
Many buyers of health care assets are back to business with a key caveat: they are now pushing for contract terms providing specific protections related to Covid-19. With skilled nursing or other facilities serving vulnerable populations, buyers want to preserve the right to terminate the deal at any time prior to closing if there is an outbreak at the facility. Some have also wanted the seller to attest to compliance with the Centers for Disease Control and Prevention’s guidance specific to Covid-19, whereas that traditionally would have been scooped up in general compliance terms before.
Several big, sophisticated sellers have agreed to the CDC-specific terms. But they have largely stayed put on other more traditional terms, essentially saying, ‘Take it or leave it.’ Some smaller health care operations in dire need of cash flow have been more flexible. The use of new contract terms has really come down to how badly the seller wants to consummate the deal.
There are two areas in particular where more deals may happen: with rural hospitals and physician practices. Covid-19 has caused more acute distress for rural hospitals that were not doing well before. Federal funding through the Coronavirus Aid, Relief, and Economic Security (CARES) Act has helped shore up some losses. But as the pandemic drags on, it will exacerbate what was already a challenging environment in many rural areas. While there aren’t that many rural hospitals left in South Carolina that are unaffiliated, to the extent it is possible to see more consolidation, we likely will. Additionally, large health systems in South Carolina may look to buy rural hospitals outside the state to expand their foothold in newer markets.
The pandemic has also created the conditions for an uptick in hospitals acquiring physician practices. Certain physician practices and other outpatient facilities — especially those that generate most of their revenue based on elective procedures — had to completely shut down all non-emergent care. As a result, these providers experienced significant cash flow disruptions. Some that had remained independent are now showing more interest in being employed by hospitals because of the income safety net hospitals can provide. As with rural hospitals, though, acquisitions of physician practices will be tamped down by the fact that there aren’t many large independent practices left to acquire in South Carolina. This is another area where the state’s larger systems may look across borders.
Cross-border transactions could pick up in both directions. Some health systems in North Carolina, Georgia and other states may consider opportunities here as well. They are likely to concentrate on more lucrative markets in South Carolina with a significant population and a good mix of payors. (For example, markets with a higher concentration of privately insured patients are generally more lucrative).
The bottom line is that health care mergers and acquisitions are getting back to business as usual, with some coronavirus-specific caveats. It can be valuable to partner with outside counsel to assess potential opportunities confidentially and analyze potential risk mitigation strategies. Experienced attorneys can also help buyers and sellers navigate a due diligence process that has become more challenging because of social distancing and unpredictable cash flow.
Walt Cartin is a partner in the Columbia office of Parker Poe. He can be reached at [email protected].