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Health Law Attorneys May Assist Enterprises in Dealing with Lender Concerns

July 15, 2020

Ferd H. Mitchell and Cheryl C. Mitchell, Mitchell Law Office

Lenders (often banks) participate in a wide range of loans to health care enterprises, including established and new lines of credit; funding for specific facilities and equipment; borrowing against receivables; and now—after COVID-19—borrowing through the Paycheck Protection Program (PPP) and Main Street Loan Program (MSLP), as established by Congress. 

The COVID-19 pandemic has required all lenders to reassess the losses that may be faced by their loan portfolios due to economic contraction and operational inefficiencies. As part of this evaluation, risk models are being revised and revalidated to provide the means for such analysis (as described by the Risk Management Association (RMA) at

In essentially all cases, lenders have assumed a degree of risk in making such loans, through warranties of the information provided by borrowers; completion of due diligence reviews; confirmation of enterprise viability; and retention of potential liability. Under the PPP, lenders must certify that funds have been spent only as allowed, and under the MSLP, lenders must retain a 5% interest in loans.

Among the borrowers most affected financially by COVID-19 may be health care enterprises that have been—and continue to be—experiencing maximum financial stress due to forced changes in services. Even with federal grants and loans, many enterprises (including physician practices, clinics, hospitals, and nursing homes) have experienced substantial losses and continue to be under financial stress.

Lenders may often ask that enterprise borrowers describe the operational plans that have been put in place to assure that loans remain viable. On the other hand, in some circumstances, lenders may offer support to enterprises in making needed changes.

Health law attorneys may find themselves actively participating in exchanges between lenders and health care enterprises, as efforts are made to improve financial stability. Particularly helpful for such efforts may be financial risk management principles that have been translated for use by health care organizations, as discussed below.

Categorizing Financial Challenges and Responses

Each health care enterprise may be evaluated in terms of the financial challenges they are facing. These challenges may be categorized by type such as unexpected losses due to mandated barriers to care that have reduced patient census; inability to accurately forecast patient demand; and increased expenses due to higher safety costs and reductions in productivity. Strategies may be developed to deal with each type of loss driver. Challenges and strategies may be linked together to achieve the most effective responses.

For example, hospitals may implement new optimized procedures to more effectively anticipate patient demand and manage operational costs through daily sizing decisions. Portfolios may document how these procedures have been developed and applied. Such changes can improve the financial status of hospitals and help alleviate lender concerns.

At the same time, other strategies may describe enterprise approaches to reducing operational costs and liability for lawsuits through increased safety. Safety-oriented interventions may involve facility redesign; carefully managed use of personal protective equipment (PPE); and appropriate testing of patients and staff. Such strategies will also depend on levels of demand for services.

Varying Patient Demand for Services

Consider that hospitals may have to adapt to ongoing increases and decreases in COVID-19 admissions and census over an extended period. The numbers of COVID-19 cases may fluctuate as efforts are made to reopen the economy while also reducing the spread of infection. Policies may need to change with restrictions increasing as infections rise too high and then easing as infections fall to more acceptable levels.

The situation is made more complex because hospital daily demands will typically fluctuate around weekly averages. Increases and decreases in demand may also result from an inability to fine tune COVID-19 interventions (social distancing, masks, and isolation) and widely varying public reactions to rules as they change.[1]  

Sizing and Safety

In this uncertain environment, hospitals will face pressure to better match daily operations to expected patient demand (sizing) and protective measures for staff and patients to levels of operation (safety) to help assure lenders of the potential for improved financial status. Daily sizing is required to manage operational expenses and to anticipate how many non-COVID-19 patients may be admitted for services. Daily safety strategies are required as the patient mix changes, along with staff duties.

During this period of instability, extra attention must be directed toward risk management applied to sizing and safety. One possible response is for hospitals to develop daily portfolios documenting the bases for their decision making, which can help counter any internal or external charges of inadequate care and potential liability.

Adaptive Sizing of Services

Hospitals need to demonstrate that day-to-day sizing efforts include reasonable use of all sources of information such as (1) daily bed census summaries with an analysis to explain the subtotals; (2) short-term estimates based on experience and insight by hospital administrative staff; (3) communications with health agencies; (4) a log of unexpected events and possible impact on operations; and (5) forecasts from models.

Many forecasts from models provide information that is of only limited use for hospital decision making. Some models only provide national or state level data, and their underlying assumptions may be far removed from the realities that hospitals experience.[2] Some results from these models may be translated to specific hospitals by using past referral patterns to estimate the percentages of COVID-19 patients in a county that are likely to seek care from a specific hospital. All models must be viewed critically and in the context of broad-based management portfolios.

Adaptive Safety Preparations

Each hospital also needs to demonstrate that safety precautions are in place to enhance operations and protect against liability. Safety procedures should be reasonably related to the expected numbers of patients and the types of care to be provided. In general, safety procedures may involve the directed movement of staff and patients; managed air flow to control circulation of the virus; appropriate use of personal protective equipment (PPE); and COVID-19 testing. Lenders may assess whether such procedures are adequate to improve operations and reduce risk.

The following information may be collected for daily safety portfolios: (1) hospital safety strategies; (2) expected daily census by patient type, care requirements, and testing for each patient type, along with estimates of staffing requirements; (3) guidelines for the use of PPE and testing, along with justifications; (4) types of PPE and testing to be used for all patient contacts; (5) guidelines for correct use of PPE and testing.

Applying Other Risk Management Principles

Health care enterprises may apply several other risk management principles to respond to lender concerns[3] Hospitals must be able to identify ineffective methods for approaching enterprise operations and adopt new approaches that take into account the uncertainties being faced. Lenders may be able to reduce loss reserves if enterprises show they are responding appropriately and are able to relearn and adapt.

Lenders may value the types of sizing and safety portfolios described above as evidence that enterprise operations are sound.

[1] A pattern of potential increases and decreases in COVID-19 cases has been demonstrated by a model developed by the consulting firm Oliver Wyman based on alternating restrictions placed on social and economic activity. Results are posted online at under the title “COVID-19 Pandemic Navigator” (updated weekly).
[2] See, e.g., Centers for Disease Control and Prevention, “COVID19Surge” model,; University of Washington, IHME model,; and Imperial College London model, In general, these models are based on differing approaches to preparing projections of COVID-19 confirmed cases and deaths.