The Affordable Care Act is affecting most aspects of the health care sector, including financing, in part because of ACA-spurred M&A. Lenders can expect to see increased demand for capital from both care providers and acquirers. "There are increasing pressures on middle-market providers that cause them to seek financing from the private markets," says Claudia Gourdon, senior vice president of Healthcare Finance Group.
HFG, a portfolio company of Fifth Street Finance Corp. (Nasdaq: FSC), lends to health care companies and provides revolving lines of credit, term loans, equipment-lease lines, letters of credit, loan syndication, debtor-in-possession financing and exit loans.
Providers expect an increase in the number of patients, but decreases in revenue and slower payments, which will increase funding demands.
Payment delays are coming from Medicaid and insurance company reimbursement, according to Gourdon.
Under the ACA, the government will not pay for the uninsured at the same level they used to.
So when many young and healthy people elect to pay a penalty instead of buy health insurance, and then go to the emergency room for treatment, the hospitals' costs, and the demand for financing will rise.
The increasing sophistication and costs of medical technology, electronic medical records and drugs are putting more financial pressure on providers, which is also creating a need for financing.
To meet financing demands, providers with revolving lines of credit may use those credit lines more than they would have previously.
But credit lines can only sustain providers for so long.
"Going forward, we expect there will be increased demand for new lines and term loans," Gourdon says.
The health care space has hosted a plethora of M&A transactions in 2013, many from private equity groups that are looking for financing.
"Generally these groups are seeking debt financing to complete acquisitions of their targets, so that's leading us to have more financing opportunities," Gourdon says.
For lenders, careful analysis is needed to analyze the viability of each company that needs financing, which requires keeping up with the changes in the health care space.
At any given point, some segments of the health care sector face more uncertainty than other areas. For example, several months ago, the skilled nursing facility group was under a lot of pressure from Medicare cuts, but now that reimbursement changes are in effect and lenders can see how companies have adjusted, that sector has become a good one to lend to.
"Health care is in transition, and everybody around it or in it needs to be flexible," Gourdon says.