The Regulated World of Healthcare Lending and Restructuring

By Jim Lodoen, Donn Herring and Hillary Martel

Healthcare financing is different from traditional lending due to the unique regulatory environment in which it functions. Where else is a bank customer subject to:

  • Revenue driven by procedures with prices regulated by state and federal agencies or governed by insurance provider agreements?
  • Whether payment of such revenues actually occurs regulated by state and federal agencies?
  • Whether facilities may be used for routine procedures (pandemic restrictions) regulated by state and federal agencies?
  • Whether a facility opens or remains open being regulated by state licensing agencies?
  • Limitations on securing accounts receivables from Medicare or Medicaid through a normal collateralization process thus requiring a “double lock-box” structure to effectively secure the collateral?

A thorough credit officer will want to understand how these regulatory functions may impact cash flow and risk associated with a healthcare credit. And a compliance officer will want to work closely with the credit officer to include covenants unique to a healthcare facility in the loan agreement.

A credit officer will also want to factor the risk associated with the unplanned possibility of rather draconian penalties under the Medicare anti-kickback statute and fines and damages under the Federal False Claims Act.

Financial stress of the healthcare industry

The healthcare industry is estimated to have experienced approximately $323.1 billion in financial losses in 2020, but for the $178 billion of Provider Relief Funds distributed to the industry and $68 billion of Paycheck Protection Program loans. Depending upon how the funds were used, both may be the subject of recoupment efforts in the future.

While circumstances have improved for the industry since 2020, the outlook for 2021 is still dire. A recent study performed for the American Hospital Association by Kauffman, Hall and Associates predicts a loss of revenue in 2021 compared to pre-pandemic revenue of between $53 billion and $122 billion. And certain segments, such as rural providers, are in especially weak financial conditions.

Other trends impacting the industry include continuing decrease in reimbursement levels, new laws requiring transparency and increased demand for telehealth services by customers versus slower acceptance of such services by payers.

Recoupment of over-payments

Healthcare borrowers also present an additional challenge with respect to underwriting known as recoupment.

This concept allows the government to withhold payment of ongoing Medicare and Medicaid payments a lender is counting on as cash flow to service the debt. If the government discovers over-payments to the borrower, which may have occurred up to six years earlier, it will typically recoup this amount by withholding future payments. There is normally a lag of several months before payments made to a borrower are audited. Thus, there is always the looming risk that past events affect future receipts.

Events that can stop Medicare and Medicaid payments include failure to:

  • Properly document provided care.
  • Demonstrate the medical necessity of the care provided.
  • Obtain prior authorization when needed.
  • Comply with other conditions for participation or payment including substantive or processing requirements.

If the audit shows that errors in how services were provided or reimbursement was handled, the reviewing agency will typically continue to look back further to note additional overpayments. Meanwhile, future cash flow from Medicare or Medicaid provided services may completely stop until previous over-payments are recouped from payments otherwise made for current services.

The recoupment of such payments is often a triggering event to move an otherwise performing healthcare credit into a workout or restructuring credit, which provides its own unique set of considerations.

Default alternatives

Similar to other industries, there are several options for borrowers and lenders to consider once a healthcare credit is in or on the brink of a default status. They include:

  • Out of court restructuring, including a forbearance agreement.
  • Receivership where a third-party receiver steps in to assume control and determines whether to reorganize, sell the business or conduct an orderly wind-down and liquidate.
  • Chapter 11 bankruptcy, controlled by existing management or a Chapter 11 trustee:
    • Reorganization.
    • Liquidation.
    • Sale as a going concern (Section 363 sale).
  • Chapter 7 bankruptcy
    • Lights out.
    • Assets sold and/or recovered by secured lender.

Challenges to disposition of the collateral

The extensive regulatory nature of the healthcare industry generally persists throughout a restructuring or sale process.

Although not impossible, it is very difficult to sell a healthcare facility as a going concern through an asset sale process to a new buyer free and clear of known or unknown recoupment risk associated with misdeeds of the existing owner. As a result, a sale process may be delayed due to either extended due diligence by the buyer to obtain comfort assuming recoupment risk or a potential buyer may need several months to obtain approval to obtain a new provider number to qualify as a Medicaid or Medicare provider.

In addition, a buyer will also be required to obtain required state licenses. Of course a buyer could acquire the stock or membership interest in the existing company but with it would come all the liabilities of the existing company, which is often not a desired option.

Finally, while a shutdown of a healthcare facility will ultimately result in the associated building and personal property being sold, the single-use nature of most healthcare facilities may make the property unattractive to many buyers.


As with most loans, a lender considering financing a healthcare facility should also consider what the exit strategy is in the event the loan does not perform. By considering the unique aspects of healthcare financing, the associated risks can be factored into the pricing and structure of the credit facility, and will result in fewer surprises if a default occurs in the underlying credit.

Jim Lodoen is a Minneapolis-based partner, Donn Herring is a St. Louis-based partner and Hillary Martel is an Overland Park, Kansas-based associate at the law firm Spencer Fane LLP.