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Healthy lending: Active sector for banks, thanks to M&A

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Vikram Venkataraman, territory practice manager, health care business banking, PNC Bank.
Vikram Venkataraman, territory practice manager, health care business banking, PNC Bank. - ()

Health care lending appears healthy indeed, with an estimated $10 billion in loans currently on the books of industry operations in New Jersey.

Mergers and acquisitions, part of a general consolidation among health care entities of all kinds, is a key driver of the robust appetite for financing.  There’s also the expansion of facilities for ambulatory services, surgical practices and mental health services.

As recently as 2010, the situation was quite different. Lending was at a near standstill in the years following the Great Recession. Then systems such as Hackensack Meridian Health and RWJBarnabas Health merged and a wave of consolidations continued. Just in the past year, deals have included Virtua Health’s acquisition of Lourdes Health System and HMH’s acquisition of JFK Health.

Meantime, Sanitas Medical Center moved into New Jersey, and Advocare expanded, moves that further added to finance institutions’ swelling loan portfolios.

“We continue to see consolidations happening, whether it’s at a large health care system or a private sector private practice space,” said Vikram “Vik” Venkataraman, senior health care banker at PNC Bank.

He added that the consolidation has led to the need for more financing for bigger offices to accommodate patient growth.

“As a result of those consolidations, we’re starting to see desires for purchasing equipment to build out practices and facilities with expected, increased patient volume. We’re seeing trends in practice-owner investment in real estate, and we’re seeing an increase in technology investments,” he said.

“As fewer and fewer patients know who to list on the question that says ‘primary care provider,’ urgent care centers will likely continue being an area of interest for patients and buyers alike.”

Roberto Camacho, assistant vice president of health care lending at Investors Bank

He also added that the move to fee-for-value from fee-for-service has also driven lending to health care practitioners, as they seek to provide services to compliment primary care, such as tele-health and electronic health records management.

“There’s been significant investments in clinical technology as well,” Venkataraman said. “Practitioners are adding significant amounts of ancillary services across the board to supplement revenue. But generally speaking, if you just sort of reverse engineer how everything is working in health care today, the patients have certain expectations. Consumer expectations are changing, so as a result of increased volume and high deductibles, we’re a need for more capital building out medical offices.”

Investors Bank’s health care lending portfolio has grown by about $100 million per year since the group’s inception six years ago, and now stands and roughly $750 million in total.

“One trend we have been following closely is what’s happening in mental/behavioral health,” said Roberto Camacho, assistant vice president of health care lending at Investors. “As a result of the Affordable Care Act, mental health benefits became a requirement for health plans and given recent setbacks to enact a measure of full repeal, it may be politically unpalatable to campaign on specifically reducing mental health benefits. … From the acquisition perspective, we have seen more private equity interest and subsequently higher multiples in this space. As of today, I suspect we will continue following the political and financial climate of this subsector.”

Urgent care is also another big area of lending, he noted. Health care systems such as MD Partners, Advocare, Virtua Health, Hackensack Meridian Health and RWJBarnabas Health have been increasing the number of urgent care centers they operate.

“It seems at every turn there is a new urgent care facility that has just opened or is about to open,” Camacho said. “There is certainly merit to the concerns of over saturation. [But] as fewer and fewer patients know who to list on the question that says ‘primary care provider,’ urgent care centers will likely continue being an area of interest for patients and buyers alike.”

Jim Raymond, vice president, commercial banking group, healthcare and commercial banking, Wells Fargo Bank.
Jim Raymond, vice president, commercial banking group, healthcare and commercial banking, Wells Fargo Bank. - ()

Jim Raymond, principal relationship manager of the health care and commercial banking group at Wells Fargo agreed that expansion and industry consolidation will continue to drive lending activity in the health care space.

“We expect to see more alliances between similar-sized practices and increases in creative partnerships to better support relationships between complimentary services,” Raymond said. “Right now, I think health care systems are working together to figure out reimbursement compression, rising costs of health care, and collection and point of care payments at time of care. That’s an area that our treasury platform services works on, so health care financing isn’t just about lending.

“As far as lending goes, activity is really across board in health care; the activity has varied from single- to two- or three-member practices, to the larger health systems,” he said. “Over the last year, there seems to be an increase in outpatient projects, as well as an increase in physician groups as looking to expand into larger offices as their practices grow, as well as looking for new real estate locations, so they can be closer to their patients or affiliated hospitals.”

Most bankers are not worried that the rising interest rates will scare off borrowers, but Camacho said that they could change the duration of loans.

“Any time rates move in any direction for a prolonged, or expected to be prolonged, period of time we can always expect an impact on number of borrowers coming to market,” he said. “When rates were flat or declining, refinances were abundant and many borrowers were drawn to longer-term lengths. As rates have risen, we have certainly seen a reduction of traditional rate/term refinance requests and instead have seen an uptick in acquisitions. 

“Also interesting is that we’ve seen a blend of those wanting to stay short term and play the market in three to five years as well as those looking to lock in long term as fast as possible before rates continue climbing …as a specialty lending unit, we have to stay engaged with trade association initiatives and attend reform update conferences while leveraging the wisdom of our professional relationships around the state.”

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Vince Calio

Vince Calio


Vince Calio covers health care and manufacturing for NJBIZ. You can contact him at vcalio@njbiz.com.

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