Law360 (May 29, 2020, 5:41 PM EDT) -- In this edition of Coronavirus Q&A, one of Foley & Lardner LLP's top health lawyers discusses how the pandemic's psychological trauma could reshape mental health care and what COVID-19's brutal toll on senior citizens means for nursing home operations and investments.
Christopher J. Donovan
This interview has been edited for length and clarity.
To start, tell me about Foley's practice for senior housing and post-acute care.
I would divide our clients into two spheres — the types of operations and the types of investors. On the operations side, we represent large assisted-living facilities, memory care facilities, skilled nursing facilities, pretty much the whole spectrum.
On the investor side, we represent private equity firms, [real estate investment trusts], public companies, hedge funds — a pretty wide variety of investors that are involved in the development, or the growth financing, or the acquisition of those facilities.
We do the M&A transactions, but we also have a national health care practice, so we also combine the M&A chops with the regulatory and compliance expertise. That's kind of our special sauce.
Isn't it somewhat unusual for a BigLaw firm to have a practice devoted to senior care?
That's a good question. We think — as evidenced by the level of [M&A] activity that's happened over the past several years — it's just a huge competitive advantage for us. There have been some massive transactions in the senior housing area that we've worked on that other firms haven't focused on.
Part of [the reason it's less common] is there is a sector of the market where you're dealing with smaller, one-off facilities. But where we get more traction is with deals where you have 150 facilities and 20 states, and you need a national platform that's able to cover the entire transaction.
How has your practice's work been changed by the crisis?
We have been just inundated with new regulations and daily announcements coming out of the federal and state governments. One highlight of the triaging we've done on a day-to-day basis is [the U.S. Department of Health and Human Services] has issued a lot of grant money under the CARES Act, and literally on a daily basis, new FAQs are being issued by HHS as to how you have to attest to that money and how you have to deploy that money for lost revenue and expenses.
As lawyers, we call this subregulatory guidance. And one of my clients referred to this as subregulatory hell, because [HHS] just kicked the deadline for attesting to some of the CARES Act funds another 45 days. That's the second extension. And the reason for that is there's an incredible amount of uncertainty in the provider community about how to attest to these funds — wanting to use them properly, and not wanting to violate the law or create False Claims Act exposure or be audited later for allegedly using the funds for an improper purpose.
How have your clients' operations changed during the pandemic? What changes might endure?
[In terms of] what I think will be enduring, certainly telemedicine is a no-brainer. It's reached an inflection point. You can see that from the loosening up of the [regulatory] requirements, the consumer demand and the payor interest, and the providers being on board, not just to control [COVID-19] infections, but also because of the convenience.
And we really see telemedicine as having provided an incredible tailwind to the expansion of behavioral health coverage, given its confidentiality.
Can you talk more about what COVID-19 might mean for behavioral health care? I could imagine the pandemic's emotional strain, and telemedicine's growth, and increased insurance coverage, all coming together in a significant way.
Behavioral health is one of the areas that I do believe has a very promising future. It was going to happen without the pandemic, in my view, but with the pandemic and the stress people are under, it's a confluence of events. There was already momentum there, with state parity laws to provide mental health benefits, but it's become much more mainstream and accepted.
The other big thing is that I think behavioral health will become a much more integrated part of primary care. When you go for a checkup in the future, and you're giving vitals, I can see where there's going to be behavioral health questions asked, and technology and [artificial intelligence] that would facilitate asking the right questions.
At that intersection of behavioral health and primary care is something very interesting for payors. If you can manage behavioral health problems early at the primary care level, you can get much better outcomes and, frankly, prevent inpatient procedures and medical complications arising from behavioral health problems.
What have been your clients' other top needs in terms of legal counsel?
Just generally speaking, the kind of legal advice that clients are looking for is much more nuanced than it was pre-pandemic. For example, with a lot of these regulatory changes, if we're doing a deal now, clients want to know, 'Are these changes going to stick?'
Coming up with a prognosis, and the impact on business, is something clients are asking us to provide — it's what I would consider more strategic and risk analysis advice, as opposed to legal advice.
How do you expect health care M&A to be affected by the pandemic?
Some areas have been given an enormous push [by the pandemic]. Behavioral health, telemedicine, the digital tools that are being used in those areas, such as AI and software, diagnostics, home health and palliative care, which is an alternative to hospice care.
Those are all areas that have had momentum, but the pandemic has accelerated that momentum, because it's often focused on how care can be provided remotely and outside of a hospital in a safer setting.
There are also areas where we've seen a pause, and where I think we're going to see some consolidation. They probably include physician practice management, hospitals and to some extent skilled nursing. Those are areas where there's a question of, 'What's the world going to look [like] once we, quote-unquote, go back to normal?' I think that the capital needs in those areas are going to remain significant, but in the meantime, the deal activity will need to await normalization.
It's sort of bifurcated [between busy and slow areas]. If you wanted to view it broadly, it would be outpatient and digital on the one side, and maybe inpatient and elective on the other.
How do you expect health care investments by private equity firms to be affected by COVID-19?
With their existing portfolios, most private equity firms are putting all of their portfolio companies on a dashboard and saying, 'OK, what are the capital needs of this company now, and in two months, and in six months, and in 12 months? What's the cash burn that's going to happen there? And is that cash availability, together with our dry powder to make additional rounds of equity infusion into that company, sufficient on the backside of the pandemic to accelerate the growth, or re-accelerate the growth, that we previously considered to be there?'
PE firms have to decide which [companies] are going to be the ones that'll be surviving this and they can really get behind, and which ones they perhaps have less conviction of. There's a lot of portfolio gardening going on.
Could the crisis make private equity firms more wary of investing in nursing homes?
[The pandemic] has showcased the fundamental payment problem with nursing homes. Most nursing homes have well in excess of 50% [of] their inpatient population covered by Medicaid. And Medicaid rates traditionally have not kept up with labor costs and care costs.
One thing that's going to have to happen — and it's not now, because states are challenged by the recession we're in — is revisiting payment methodologies for nursing homes. They're clearly going to be getting sicker patients over time. It may be that we have a much sicker population in [skilled nursing facilities] that deserves a higher reimbursement level.
I'm optimistic nursing homes will be around, but the model may change, and I do think there's going to be some consolidation, because the capital requirements are going to outstrip what I consider to be inferior Medicaid rates.
You probably saw that the industry got $4.9 billion from CARES Act funding. But the speculation from investors and operators in this space is that's probably enough to cover the [personal protective equipment] they need and the testing that's been mandated by [HHS]. I don't think that's going to solve the long-term problems. There does need to be payment reform for SNFs to really provide the role they're capable of providing.
So in the longer term, how could the business and regulatory environment change for nursing homes?
The pandemic has pointed out that funding SNFs in a way that really makes them much more adaptable to situations like this could be a huge advantage. You've read about the number of COVID deaths — half of them in many states are in nursing homes. But most of the capital — I'm not saying this was wrong — was focused on hospitals to deal with the surge. Nursing homes were looked at more as discharge sources — there wasn't a focus on how complicated the contagion was in those environments and really putting the resources where they needed to be.
I've worked in the post-acute space for a big chunk of my career, and I just think they're the unloved stepchild of the health care continuum. There's been a lot of enforcement action on quality, and I'm not saying every operator is undeserving of that. But I would say the bulk of the operators and investors want to provide quality care, and that they're in a very challenging environment where they don't have the resources to make it happen.
I'm a big believer in outpatient care, and when I look at all the trends that are going on, everybody wants to go home, everybody wants to use telemedicine. I totally understand that. But there's an enormous hole in that argument because some people just aren't able to go home immediately, and we need SNFs. In the rearview mirror, we need to look at payment for SNFs. And it may be that partnership models are involved.
I mentioned home health — maybe SNFs and home health and technology providers will collaborate more on partnerships where they can manage patients and get them through the system more efficiently and cost-effectively. Maybe some creativity and payment reform happens. Hopefully there are some good things that come out of this.
--Editing by Kelly Duncan.
Check out Law360's previous installments of Coronavirus Q&A.
For a reprint of this article, please contact email@example.com.