When Nursing Homes Hit Financial Trouble, Vendors Feel the Pinch — and Fight Back

When a skilled nursing provider enters receivership or bankruptcy, the safety and wellbeing of the residents is the top priority for all parties involved. The financial struggles raise questions about the continued provision of necessary care, and the safe transfer of operations becomes paramount.

But in many recent SNF bankruptcies, or cases where a SNF had to enter receivership, vendors have been coming up short. And in one case at the beginning of 2019, three of them — Medline Industries, Healthcare Services Group (Nasdaq: HCSG), and Monida Healthcare Staffing Solutions — banded together to file an involuntary Chapter 7 case against the Edina, Minn.-based Welcov Healthcare, forcing it into bankruptcy.

That case was unusual, multiple experts stressed to Skilled Nursing News. But vendors do have a tendency to get burned when the SNFs that they service run into financial trouble, and it’s led some of them to take more proactive steps in such cases.

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“It does seem like the vendors are getting a lot more aggressive, and I think the reason why is they’ve been getting such terrible outcomes,” David Gordon, a shareholder at the law firm Polsinelli, told Skilled Nursing News.

Gordon served as counsel for Welcov during its bankruptcy. And another lawyer involved in that case — on the other side of the table, representing the creditors — had a similar view.

“I think there’s a lot more interest lately in trying to be proactive, to settle out and get some leverage while [the vendors] still have leverage against the company,” Robert Hirsh, partner at the law firm Arent Fox LLP, told SNN. “There’s definitely a lot more interest in trying to get leverage out of companies as soon as they can, before the company takes the leverage away from the vendor.”

David Lawlor, the president and CEO of the Shelton, Conn.-based Long Hill Company, a management affiliate of United Methodist Homes in Connecticut, sees it somewhat differently.

Long Hill specializes in stabilizing troubled SNFs, usually in receivership cases, and from Lawlor’s viewpoint, increased vendor assertion isn’t something that he’s seen. However, vendor concerns and worries about write-offs are always part of a receivership or bankruptcy process, he noted.

“We’ve been dealing with these types of issues for years, and I don’t think there’s any uptick in activity,” Lawlor told SNN. “It’s more or less that each deal has its own set of circumstances that we just look to problem-solve around.”

Vendor claims in bankruptcy

The point is worth repeating, and Gordon and Hirsh emphasized it: The Welcov action was an unusual case. But vendors can still suffer significant financial headaches in even more run-of-the-mill bankruptcy actions.

When Orianna Health Systems entered Chapter 11 bankruptcy in March of last year, the top unsecured creditor was Healthcare Services Group, with an claim of $17.59 million. When Senior Care Centers entered Chapter 11 bankruptcy in December, the housekeeping and dietary services provider was the second-largest unsecured creditor, this time with an claim of $7.96 million. When 33 Preferred Care SNFs entered bankruptcy in November 2017, Healthcare Services Group was once again the second-largest unsecured creditor, with an claim of $3.17 million, according to Preferred Care’s voluntary bankruptcy petition filed in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division.

Hirsh noted to SNN, however, that there are other, larger creditors in such cases than Healthcare Services Group — a point borne out by the bankruptcy documents, Orianna aside. In addition, how vendors respond to bankruptcy varies on a case-by-case basis, he said, and is often very dependent on the culture of the vendor itself; in other words, there’s no clear trend in terms of response or what vendors will try to do.

Many of the same vendor companies turn up in the bankruptcy cases, Gordon noted, especially given consolidation in the health care services space. Other common entrants on the lists of unsecured creditors in SNF bankruptcies included pharmacy companies, medical supply firms, and insurance companies.

Omnicare, which provides pharmacy services to long-term care providers, had unsecured claims of $7.04 million in the Senior Care Centers bankruptcy and $3.85 million in Orianna’s bankruptcy. Though those two cases alone were not the cause, Omnicare’s owner, CVS Health (NYSE: CVS), had to take a $2.2 billion impairment charge in the fourth quarter of 2018, which the pharmacy giant blamed in part on bankruptcies in the long-term care industry.

“These challenges include lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018, and continued facility reimbursement pressures,” CVS wrote in a statement announcing the quarterly results.

In fact, one vendor with a major presence in the industry — medical equipment manufacturer Joerns — began its own Chapter 11 bankruptcy proceedings in June, citing distress in the post-acute space as the cause of its liquidity problems.

Joerns was also a top unsecured creditor in many of the recent SNF bankruptcies, with its affiliates holding an claim of $2.26 million in the Senior Care Centers bankruptcy, an claim of $293,887.32 in the Orianna case, and an claim of $71,333.42 in the Preferred Care bankruptcy.

Communication key in receiverships

And then there are the receiverships. Amid financial woes, SNFs across the country — from Virginia to Ohio to Wisconsin — have been placed under the control of third-party receivers, caretaker operators that try to maintain resident care and safety until the properties can either be transferred to permanent providers or closed.

The implosion of the Wood Ridge, N.J.-based Skyline Healthcare alone led to the court-ordered receivership of buildings in multiple states, including Kansas, Massachusetts, Nebraska, Pennsylvania and South Dakota.

In receivership situations, vendors can consider filing objections in order to secure better outcomes on their claims, Gordon said. And some have done just that: After lender MidCap Financial objected to the transfer of Skyline properties in South Dakota over concerns that it would not recoup its money, the regional health system Avera raised an objection based on what it was owed by Skyline for telehealth services.

In the end, the transfer of the Skyline properties was approved, but with the stipulation that vendors owed for services provided in the receivership will be paid after MidCap is reimbursed.

“What lenders need to be mindful of is if vendor arrearages become greater than the cycle of payments in a particular state, even though a mortgage might be being served in some capacity,” Lawlor said. “Lenders, I think, need to be mindful of the growing risk to vendors … Sometimes the amount of vendor arrearages can become an issue that can perhaps be overlooked.”

During receivership situations, clear communication to vendors about the instructions from the court is absolutely essential, Lawlor told SNN. It’s common in troubled situations for vendors to be stretched beyond their typical payment terms, he explained, but the point of a receivership is to allow the operations a chance to stabilize. To that end, Long Hill might need to educate and assure the vendors — particularly those that haven’t been through a receivership before — that they can count on the funding source of a particular case.

“Typically or the first 60 to 90 days of a deal, we’ll see a lot of vendor management issues, until we get into a rhythm of cash flow,” Lawlor said. “Then that vendor anxiety seems to subside and they understand the process that we’re undertaking.”

Looking to the landlords

To help ease the path and secure better outcomes, vendors can consider changing the contract or payment terms for companies that have financial issues — particularly operators that have some cash flow and attempt to manage it by not paying vendors, Hirsh said. Failing that, vendors can try to force a receivership; the third option, which was what played out in Welcov’s case, is the involuntary bankruptcy.

“One other way, if you have SNF or assisted living, those entities — for the most part — never really own the dirt,” Hirsh said. “So you want to go to the landlords first and try to work out a deal with the landlord.”

Part of the challenge is that in a skilled nursing bankruptcy or receivership, it’s usually the operator in distress, rather than the owner of the building, Gordon said. And when the landlord finds a new operator to take over, the benefits of that transition go to the landlord, rather than the creditors.

This seems to have been a factor in the Welcov case, where the landlords took a back seat to the creditors in the repayment line to ensure the properties could be transferred.

“All these vendors, what they’re saying is, ‘This isn’t fair. All the value is going to the landlord, and none of the value is going to the old operator,'” Gordon explained. “And that’s a bad deal for the creditors of the old operator. I think the vendors are tired of that happening over and over again.”

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