The nursing home and assisted-living business community is challenging in any economy, and the COVID pandemic has only exacerbated the fiscal issues surrounding the operation of these businesses. Recently, the American Health Care Association/National Center for Assisted Living projected 400 nursing home and assisted-living facilities will close in 2022. Knowing that this industry is in distress means very little without a plan for response, which is critical to any successful turnaround.
Diagnosing the Client
The key to unraveling a distressed financial situation is identifying the factors that led to the problem in the first place. In the business of assisted-living facilities, there are several factors that may give rise to financial distress, including demographic shifts, market changes, poor management and other issues unique to the industry. A few examples include:
- Has the neighborhood surrounding the facility changed?
- Has the community contracted in number or trended towards a younger population?
- Have newer facilities been built that has oversaturated the market for beds?
- Have community tastes changed to prefer urban/rural facilities with more or different amenities?
- Are the bad contracts in place for food service, linens or grounds maintenance?
- Are there staffing shortages?
- Have poor marketing decisions been made over time that have diminished the interest or perceived value of the facility?
- Have Medicare reimbursement rates fizzled and have opportunities for governmental payments been maximized?
- Are the False Claims Act lawsuits looming because of past bad acts?
- Does the facility operate in a Certificate-of-Need State and what are the economic and procedural hurdles involved in acquiring or transferring available bed space.
The marketplace for the assisted living business is very complex, and financial problems arising at a facility are likely to come from multiple sources. Once problems are identified the next question is how to respond. The overriding theme to working with a distressed company is that once you dig yourself a hole, the key is to stop digging. Put another way, continuing to operate at a loss, but changing nothing, is a recipe for disaster.
A Plan of Care
When advising people or businesses in a distressed financial situation, it is important to put all options on the table. These may run the gamut from out-of-court restructuring, receivership, bankruptcy or even closure. The best result for each situation will depend on a number of factors.
An out-of-court restructuring is the best course to maximize flexibility, minimize transaction costs and preserve equity. To be successful, an out-of-court restructuring has certain prerequisites. First, there must be adequate reserves or an ability to attract additional capital to implement changes. Key stakeholders must also be willing to be flexible and patient as a struggling facility stabilizes. Then, with working capital and time, a strong leadership team with a clear vision to address problems can lead a successful turnaround without the need for court supervision.
A receivership can sometimes be a good vehicle to restructure a distressed facility. The advantages of a receivership can be speed and the ability to continue to operate within an existing Medicare/Medicaid reimbursement framework. Receivers can often be brought in that are highly specialized and knowledgeable about the assisted living industry. They will have the experience to make decisive decisions that can triage an organization and put it on the path to recovery. Additionally, receiverships are typically far less expensive than the alternative of a bankruptcy as there simply are fewer parties and lawyers who must be paid as part of the reorganization process.
Nonetheless, a bankruptcy case for an assisted-living facility is sometimes the only way to achieve a successful turnaround. The bankruptcy process provides unique tools. For example:
- Bankruptcy Code §362 provides an automatic stay that can provide relief from harassing creditors and allow management to focus on the future rather than past due bills. It is important to remember, however, the stay does not affect ongoing criminal investigations or tax audits.
- Bankruptcy Code §365 provides a good way to modify or reject unfavorable contracts. For burdensome employment or service contracts this tool can be utilized to streamline services and right size future obligations.
- The provisions of §363 allows for a sales process in bankruptcy that is both timely and efficient. A word of caution, however, some healthcare contracts require specific regulatory approval to ensure that the purchaser is qualified to operate the facility.
Finally it is important to remember that these healthcare facilities require the appointment of a patient care ombudsman under §333.
There are times when the best option for a troubled facility is to simply shut it down. An organized closure that provides for the transfer of residents and the wind down of operations may be the best outcome. For example, an aged facility with few amenities and high overhead may be trying to compete against a new operation that is going to attract the future residents in a given community. Sometimes a facility may be suited for apartment living or even torn down if the underlying real estate has substantial value. Closing a facility should not be viewed as a failure, but rather as the right decision for all the parties when the circumstances are against the facilities’ long term viability.
The business of assisted living facilities is difficult and complex. Further, it is an area that continues to face financial challenges. Diagnosing problems and applying remedies in the correct manner is a challenging task, but is achievable. This business segment is ripe for ongoing work for reorganization professionals. Our aging population and ever-changing healthcare system will ensure that more challenges are ahead.
Scott Williams is a partner at RumbergerKirk in Birmingham. He focuses his practice on bankruptcy, reorganization and creditors’ rights and commercial litigation. He can be reached at 205-572-4926 or [email protected].