Healthcare Private Equity and COVID-19

March 27, 2020

As effects from the 2019 novel coronavirus (COVID-19) pandemic set in, stay-at-home orders and business closures are disrupting American lives and businesses. The healthcare industry is no exception, with the pandemic both creating a surge in necessary emergency/hospital care and presenting significant practical, financial and legal challenges, particularly for providers of non-emergent services and procedures. As federal and local health officials move to address this crisis, private equity funds are also taking steps to support their healthcare platforms that are the front-line defenders against this pandemic.

As discussed in a March 19 McGuireWoods legal alert, it is critical that the healthcare private equity industry brace itself for the full brunt of this crisis. Firm lawyers are assisting clients as they grapple with numerous issues this week, including the following:

1. Telehealth and Non-Essential Procedures. Whether in response to local orders or the Centers for Medicare & Medicaid Services (CMS) recommendations on postponing adult non-essential procedures, healthcare providers face significant declines in non-emergency services. Many platforms have proactively postponed elective services, and shifted some volume of encounters to telehealth platforms. As discussed in a prior McGuireWoods legal alert, the U.S. government took action to ensure greater access to healthcare via telehealth services (especially for high-risk Medicare beneficiaries) while simultaneously limiting the spread of COVID-19. States are following suit with similar actions to expand access to care through both Medicaid and commercial payors. This is a rapidly evolving area, with additional changes in the proposed Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Providers should consider engaging in telehealth visits to provide continuity of care during this crisis and determine when a procedure may become more urgent.

2. Labor Force Reductions. With reduced demand, many platforms are seeking reductions in the expense of their labor force through reduced hours or wages, employee furloughs, temporary or permanent layoffs. Employees who have been furloughed or laid off, or whose hours have been reduced, may be able to access unemployment insurance benefits, with many states waiving waiting periods. Platforms considering such reductions need to consider federal WARN Act notice mandates, similar state notice mandates, the length of any temporary furlough, employee benefit plans, how reductions may impact exempt status, location of job changes, and other considerations, which may apply differently for exempt and non-exempt employees. Generally, employers should be aware that salaried employees have to be paid if they performed any work (even five minutes responding to an email) during the work week in which they are furloughed or laid off — i.e., if they are not furloughed on the first day of a given week, they will be paid in full for that week. Finally, healthcare providers often have employment agreements with physicians and other clinical employees, which should be reviewed to understand the impact of such reductions on their contractual commitments.

3. Families First Coronavirus Response Act Emergency Leave. As discussed in a prior McGuireWoods legal alert, the Families First Coronavirus Response Act, signed into law last week, requires each private employer with fewer than 500 employees to provide special paid emergency sick and family and medical leave in certain COVID-19-related circumstances, partially to be offset by refundable payroll tax credits. These new benefits are scheduled to begin April 1, 2020. Healthcare platforms often have to review the employee counts across multiple legal entities based on corporate practice of medicine doctrine structuring. Platforms with fewer than 500 employees should prepare to offer these new benefits to their employees.

4. Assistance for Employees. Many healthcare platforms reducing their labor force may want to assist their employees outside of government-sponsored unemployment insurance (e.g., benefits through charitable organizations, public charities, private foundations and direct payments from the platform). As discussed in a prior McGuireWoods legal alert, platforms should examine a number of factors with such assistance including whether the platform will want to continue the program beyond the current COVID-19 pandemic. In addition, employers should also review existing employee assistance organizations or relief organizations in their communities that may have an immediate mechanism to receive contributions and provide assistance to those in need. Further, states are waiving unemployment insurance waiting periods, and federal efforts in the CARES Act may increase payouts under these unemployment programs to assist, as well.

5. Rent Abatement and Other Material Commitments. As noted last week and discussed in a prior McGuireWoods legal alert, when the truly extraordinary and unexpected happens, there are three legal concepts that may offer relief: force majeure, impossibility and frustration of purpose. While state courts vary in how they interpret these legal principles, there may be some ability to recoup or reduce contractual losses stemming from COVID-19-related issues. As an initial matter, platforms should review existing commitments and triage based on the magnitude of the commitment and key dates (payment, performance, etc.). From there, platforms can assess how best to address such commitments and whether arguments exist for mitigating losses by challenging their contracts. One area to focus could be real estate as many rental payments are due at the start of the month (Apr. 1). Landlords are seeing a number of such abatement requests and depending on the relationship may take different positions in response to these requests.

6. Continued Financing/Liquidity Considerations. Funds should continue to consider if platforms have necessary short-term capital available and, if not, should utilize credit lines before depleting their cash reserves. Lenders continue to fund revolver draws, and we continue to see funding for transaction debt. We are also hearing from non-traditional lenders who will lend into the crisis if a platform needs funds while not qualifying for a more traditional lender’s underwriting. Private equity funds are mindful that their platforms are also approaching the end of the first quarter and will need to report financial status in the next 45 to 60 days to their lenders. Therefore, funds may need to review their loan covenants and begin discussions with their lenders. Lenders may work with funds, particularly when the fund or the platform has broad-based relationships with the lender during this time of financial concern if the fund approaches the lender proactively to discuss financial covenants.

7. Insurance Policies. Funds should also consider their platforms’ insurance policies to determine if there is coverage available to cover pandemic-related losses. Platforms may have business interruption policies, worker’s compensation (for any workplace-related COVID-19 illnesses), civil authority policies or even freestanding supply-chain policies. Even if such policies exist, depending on the exact policy language in the coverage’s riders, whether the insurer will pay based on COVID-19-related closures remains to be seen. For example, will COVID-19 virus contamination to an insured’s property or a nearby property trigger coverage, particularly when the office could be cleaned and reopened, but the government requires closure statewide? Some states have proposed legislation. That said, in this time of great uncertainty, reasonable measures in reviewing policies now can help preserve a platform’s rights as insurers review claims in the coming months. McGuireWoods is hosting a Business Interruption Coverage for COVID-19 webinar on April 2 to discuss these concepts further.

8. Anticipated Policy Changes. A $2 trillion stimulus package to respond to the COVID-19 pandemic passed the U.S. Senate on March 25. If signed into law, the legislation will have a significant impact on the U.S. economy and various facets of the healthcare industry. In addition, state policymakers continue to respond to the pandemic, whether requiring businesses to close, prohibiting non-essential medical procedures, or expanding capacity through telehealth, out-of-state providers or hospital surge capacity. Federal regulators also aim to ease regulatory burdens by delaying quality reporting, providing telehealth waivers, changing Medicaid requirements and taking other action. Private equity funds should monitor these changes as new requirements and opportunities are presented for platforms continuing to serve patients and communities during this difficult time.

Please contact the authors for additional guidance on how private equity platforms with healthcare investments are responding to the COVID-19 pandemic. McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues. We anticipate further developments in the days and weeks to come, and we stand ready to work with you on the challenges you face.