Start-Up and Growth Phase Challenges that HCB Owners Should Know

consolidateWhen riding out the course of a business’ life cycle with success in mind, it is imperative to examine some of the impending challenges that could occur in the important stages of the life cycle: start-up and growth.  The Ambulatory M&A Advisor welcomes 2017 by taking an in depth look at some of the challenges that may be faced during the start-up and growth phases of a healthcare business’ life cycle.

Thomas Hawk, III, partner with King and Spalding says that in the start-up phase, regardless of industry, one of the key challenges that new businesses face, is liquidity.  However, Hawk says there are particular challenges that healthcare companies can face in that regard.

“One of those is the insurance credentialing process.  That process takes time to get agreements in place and to get the credentialing process completed.  In addition to that, the way payors pay for services is often through bites.  You can code for “XYZ” and “ABC,” but to the extent that you are delivering some sort of new or innovative service that is not recognized by payors either as necessary or useful, it can be a challenge to get paid for that service,” Hawk says.

“The other issue, depending on the type of healthcare business, is that there can be regulatory impediments to starting up.  The most obvious of those is the Certificate Of Need process, where in the majority of states, in order to offer certain items or services, you have to have approval from the state before that is possible.”

Hallie Gibbs, II, managing partner of Gibbs, Pool & Turner adds that from the start-up perspective one of the most significant aspects is really dealing with the buy/sell structure of the ownership interest, whether it is an LLC or a Corporation.

“Typically, these days, there won’t be a whole lot of capital that is put into the business to begin; but then as far as what happens in the event of retirement or resignation…those immediate concerns of how they are going to settle, calculate and value these issues are a concern,” Gibbs says.

Hawk adds that another area of concern during the start-up phase is financing.

“With respect to debt or equity financing we are seeing investors become increasingly sophisticated in evaluating the business models of healthcare companies.  So, proving to the potential investors is a challenge, and we are seeing a lot of smaller businesses having a challenge when getting access to financing because these investors want to see a long proven track record of profitability.  Also, investors are becoming concerned about reimbursement changes and how your company will fit into the new value-based care model,” Hawk says.

Hawk explains that a way to overcome this challenge is to have a clear plan, articulate the plan to investors as to how the business is profitable, and how the business fits into the new reimbursement models that are already coming down the pipe.

During the growth stage and start-up stage alike, Hawk says states that have a Certificate of Need (CON) law can present challenges for providers looking to start and expand businesses.  For those states that have a CON law, Hawk says that need process will whittle out excess capacity in certain markets.

“That being said, not everything is subject to CON, and I think in particular, what we are seeing in certain retail health spaces is they are beginning to be overcrowded.  I think the best way to overcome the challenge of whether there is a need in a particular market is good old fashioned market research to determine whether or not there is too much competition or if there is a particular need in the market for the service that you need to offer,” Hawk says.

Gibbs says that from representing a lot of healthcare providers, he believes that overcoming this issue would be driven by the needs of a lot of the hospitals in their areas, as far as whether they can provide services for the hospital through a professional services agreement.  Also, dealing with the various healthcare insurance providers as far as need in the market is important.

Steve Sellars, CEO, Premiere Health provides some examples of saturation challenges by examining the urgent care market specifically.

“Looking at the urgent care model and where we are today, certainly, increased competition and market saturation has to rate very high in terms of challenges for both new and existing operators that are trying to expand.  We are seeing hospitals ramping up their activity in the urgent care space.  They are buying up existing operators, opening their own centers, and they are not always motivated by making money; sometimes it is more about capturing market share and down-stream referrals,” Sellars says.

As far as advice on expansion, Gibbs says business owners have to be up front with the particular referral sources in that marketplace.

“As far as whether there is an opportunity to merge or create an actual network with each other truly depends on the current marketplace, but they have to explore that, reach out and have a lot of meetings with those types of physicians or specialists that would work well together.  Really, it is a matter of having serious meetings and getting down to the details on it.  A lot of those meetings do occur but it seems rare that parties actually get together these days and make something happen,” Gibbs says.

Other issues in the growth stage that Hawk and Sellars bring up are issues involving healthcare compliance and implementing new services for patients.

“I think in the main growth stage for healthcare companies in particular, one thing we see clients needing to focus on is having the resources to devote to compliance efforts,” Hawk says.

According to Hawk, as a business continues to grow and get larger, the regulatory risk associated with the business increases because the business has a larger target on its back.

“We see providers moving up the complexity chain, having a challenge with devoting enough resources and pivoting to focus on compliance and not just focused solely on increased revenue,” Hawk says.

On implementing new services, Sellars says businesses in the industry are always looking at ways that they can differentiate themselves from other operators and healthcare providers.

“Whether it be primary care practices or retail health clinics….we look at what we can do to differentiate ourselves from those other operators.  At the end of the day it is about creating patient loyalty.  So, when it comes to implementing new services, you have got to make sure that it is something the patient is interested in.  It has to be done right and done well; you have to make sure you have the right implementation plan for any new service.  A lot of times what goes along with that is very effective and thorough training programs for your staff,” Sellars says.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

 

 

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