Healthcare Lending 101

1. Healthcare Lending 101 RMA Texas Spring Conference Lisa Wood CFO – Harbor Healthcare System April 25, 2019

2. Syllabus • Chapter 1 – Decide If You Really Want To Get In To This • Chapter 2 – Understand the Industry • Chapter 3 – Getting Past The Gatekeepers • Chapter 4 - Understand Your Potential Customer • Chapter 5 – Underwriting A Healthcare Loan Request • Chapter 6 – Maintaining The relationship

3. Chapter 1 – Decide If You Really Want To Do This • My Story • Why Lend to Healthcare Care • Why NOT to Lend to Healthcare

4. Why Lend To Healthcare • 18% of US GDP • Recession Resistant • Solid payer sources

5. Why NOT To Lend To Healthcare • Highly regulated industry • In Flux – ACA appeal/replace on-going • Most physicians are not business people

6. Chapter 2 – Understand The Industry • Major Categories • Payers • Laws • Revenue Cycle • Information Sources

7. Major Categories • Physician Services • Acute Care • Post Acute Care • Ambulatory Care • Ancillaries • Home Health • Behavioral Health

8. Payers • Medicare • Over 65, disabled, or long term dialysis patients • Part A – hospital • Part B – physician services • Part C – Medicare Advantage Plans • Part D - Medications • Federally funded and administered • Medicare ACO’s – MSSP (shared saving) and Next Generation

9. Payers • Medicaid • Low Income Women and Children (in Texas) • State and Federally Funded - ratio based on demographics • Federal sets minimum requirements, state administers • Over half of states have expanded Medicaid to include men • SCHIP • Covers children from low to moderate income families

10. Laws • Always ask: Who is your law firm/attorney? • Get to know the healthcare attorneys in your market • Always ask: how do you stay compliant with all laws and regulations?

11. Laws • Stark - civil • Anti Kickback - criminal • Medicare Fraud and Abuse - criminal • HIPPA - civil

12. Information Sources • Organizations to Join • Healthcare Financial Management Association (HFMA) • Medical Group Management Association (MGMA) • Local Medical Society • American Hospital Association • Email Lists • Kaiser Family Foundation • American Medical Association • Modern Healthcare • Fierce Healthcare • Law firms with healthcare areas

13. Information Sources • RMA • RMA Healthcare Lending Forums • Lending to Dental and Medical Practices • Study Packs

14. Revenue Cycle Medical Practice Example • Appointment is made • Insurance verified • Patient is seen • Co-pay/deductible is collected at check out • Chart is closed • Claim is billed • Reimbursement by payer occurs/Request for more information is sent • What Could Possibly Go Wrong?

15. Chapter 3 – Getting Past The Gatekeepers • Network – physicians attend Medical Society events • Construction lenders at your institution may be working on a healthcare property – ask them who the investors or tenants are and set up a meeting • Private Banking group may be working with physicians – sit in on a meeting • Find out who’s in charge – physician, office manager, CEO/CFO and drop that name when setting up a call • Schmooze the staff – offices close during lunch – sandwich trays are welcome

16. Chapter 4 – Understand Your Potential Customer • Operations • AR • Organizational Structure • Compensation • Legal/Compliance

17. Operations • Know and use the jargon – but don’t try to fake it • Ask them to tell you their revenue cycle process • Who manages the office and billing function? • Internal billing or outside company? • In network or out of net work? • What are reimbursement rates on in network contracts? • Indexed to Medicare rate or specific amounts? • How do you track if you are getting paid according to your contract? • How often do you renegotiate contracts? • Who handles compliance?

18. AR • Questions to ask when getting an A/R Listing and Aging • Gross or Net? • If Gross – what is historical contractual adjustment as a %? • Is this a typical % for this category? • MGMA annual survey can be helpful to benchmark! • How long does it take to collect an AR? • Medicare can take up to 30 days – 15 days is typical • Medicaid can take up to 30 days – 6-10 days is typical • Private takes 45-60 days? • Using a Lockbox? • Using ACH as much as possible?

19. Organizational Structure and Compensation • Organizational structure • Single owner with provider employees • Multiple partners • PA’s with Management company • Hospital owned • Compensation Structure • Salaries • Production • Combo • Distributions/Owner Draws

20. Legal/Compliance • Who is their law firm/attorney? • You should be familiar with the answer • Who handles compliance? • Are they qualified? • How do they keep up with all of it?

21. Chapter 5 - Underwriting • Debt Coverage or Fixed Charge Coverage Ratio • May need to add back excess cash flow of guarantors, depending on organizational structure • Debt/Net Worth Ratio • Personal Guarantees • Joint and several unlimited is difficult to get • Borrowing Base • What to do about governmental receivables? • How old A/R to include?

22. Chapter 6 – Maintaining The Relationship • Do: Email relevant news articles related to their practice • Do: Stay on good terms with office manager • Do: Schedule regular update meetings to stay in touch • Do: Get Treasury Management involved • Don’t: Expect physicians to be your typical commercial borrower • Don’t: Bombard them with sales pitches for other products/services • Don’t: Overreact on bad news

23. Review for the Test Key Takeaways • Learn the Industry – you can’t fake it • Legal and Compliance are a must – who is your attorney? • Gross or Net A/R Aging? One last thing – Physicians

24. Questions? Lisa Wood Lwood@harborhcs.om