What’s Up, Doc?

New health care laws spark operational changes and loan demand from medical providers

By Katie Kuehner-Hebert

The doctors are in, and they need money. New lending opportunities to create a niche serving health care providers—who are looking to consolidate and revamp their operations because of the new federal health care laws—await community banks.

The new laws are also expediting seismic changes within the health care industry—the increased coordination between providers to promote wellness and reduce costs, and the consolidation of medical practices and hospitals—all of which also spells opportunity for community banks, say medical and financial experts.

Under the American Recovery and Reinvestment Act of 2009, hospitals and physicians were incentivized to implement and use electronic medical records by 2015, and they will also face reductions in Medicare payments for not becoming a meaningful user. Moreover, the Patient Protection and Affordable Care Act of 2010 outlines certain requirements for providers in meeting quality metrics and for coordinating care. Based on their performance, they can receive payments or avoid penalties. The ACA also proposed guidelines for establishing accountable care organizations so they could receive Medicare payments.

Richard L. Gundling, vice president, healthcare financial practices at the Healthcare Financial Management Association in Washington, D.C., says that the new laws are expediting current industry trends. “Before, hospitals were only paid if a person was sick,” Gundling explains. “Then the industry took a step back and said, ‘Let’s pay providers to keep people well.’ A lot of healthcare folks have been pushing for this, including our members, and the ACA [law] sped it up.”

Investing in IT

This new “drive toward value” medical standard doesn’t necessarily translate into more bricks and mortar, but rather the investment in clinical information systems with business intelligence software and electronic patient records applications. “Health care providers are going to have to be able to mine data to better understand what care is working and what care is not, and to better pinpoint when the patient might be sick again—it’s evidenced-based medicine using predictive modeling,” Gundling says.

Health care providers are also investing in decision-support systems, financial reporting and cost-analysis in order to bring clinical quality up and drive costs down. Community banks can help finance these changes, says Dmitry Kondratyev, vice president of commercial loans and medical practice banker at Main Street Bank in Bingham Farms, Mich.

The $145 million-asset community bank finances the purchase and tenant improvements of multi-disciplinary facilities formed by different medical practitioners, such as family doctors, cardiologists, gastroenterologists, obstetricians and pharmacists. It also specializes in financing medical practices that perform certain procedures paid for with cash or affordable repayment plans.

Whatever the borrower’s business model, part of the proceeds from the bank’s loans to these medical ventures are now typically used to purchase computer systems and software to support the new electronic medical records requirement.

The $2 billion-asset Torrey Pines Bank in San Diego is financing technology upgrades for medical practices through term loans, separate from its clients’ existing operating lines of credit, to mitigate for the absence of traditional collateral such as real estate or equipment, says Leo Schaeffer, senior vice president and senior commercial loan officer in the bank’s Los Angeles division. Torrey Pines Bank also requires personal guarantees by the medical professionals. “The last thing they want is disruption in their business because of their technology platform, so they’ll definitely want to pay the loan off,” he says of these health care businesses.

Positioning for change

The new health care laws are also accelerating the pace of consolidation within the health care industry, and Torrey Pines Bank helps finance and advise merging practices on investments that could ultimately save them money, Schaeffer says.

In Columbia, Mo., the $1.7 billion-asset Landmark Bank helped its rural hospital, Ozarks Medical Center, free up cash to make the required technology improvements by participating in the refinancing of $21.4 million in construction bonds, says Dan Corman, a credit executive with Landmark Bank. The West Plains Industrial Development Authority issued the tax-exempt private-placement bonds and Landmark Bank—along with seven other community banks—funded the hospital construction through the bonds.

“The hospital wants to get positioned for changes coming in the industry—they think margins could be tighter in the future as a result of the new health care law,” Corman says. “This refinancing gave them the opportunity to save substantially on expenses, particularly their interest payment obligations. This bond issuance helped us book a good earning asset and reinvest in the community.”

Covering new ground

And then there are health care providers that are just taking advantage of the depressed commercial real estate market, says Keith Merklin, senior loan officer, medical financing at the $340 million-asset Live Oak Bank in Wilmington, N.C. “The commercial real estate market is trying to recover from the financial crisis, so there is a ton of inventory available for medical doctors to buy a building or even buy land to build a new building,” he says. “We are reacting to their requests by using Small Business Administration loans to provide favorable terms for these practitioners.”

Live Oak Bank launched its medical lending group this year because the industry has such low default rates, according to the U.S. Small Business Administration. “There will always be a need for medical services, from dermatologists treating problems from sun exposure, to OB-GYN doctors delivering babies, to people going to the eye doctor to get glasses,” Merklin says.

“Medical practices have better incomes than many other types of practices, and that enables them to better service their debt. That is how we can grow, by picking industries with very low default rates.”


Katie Kuehner-Hebert is a financial writer in Running Springs, Calif.