Healthcare bankruptcies trending 25% higher in 2022; Senior Care most at risk
With a challenging outlook for many providers and their capital sources alike, Gibbins Advisors expects the uplift in healthcare bankruptcies already seen in 2022 to accelerate through 2023.
August 19, 2022
Gibbins Advisors, a top 10 healthcare restructuring advisory firm, has released new research that shows Chapter 11 bankruptcy filings this year for large healthcare organizations (with liabilities over $10 million) are tracking 28% higher than 2021.
This comes after large healthcare organization bankruptcies in 2021 were 44% behind 2020 levels.
Financial Crisis Averted During Pandemic
At the outset of the COVID-19 pandemic, a catastrophic amount of business failures was expected. However, at least in healthcare, the converse was the reality. Many temporary measures such as federal government programs and state-based funding sources provided the cash needed to enable providers to remain open and continue to care for patients.
In addition, waivers and extensions granted by lenders resulted in less restructuring activity, including fewer Chapter 11 bankruptcy filings.
“Providers that may have been cash poor before the pandemic now had strong cash balances, which helped to weather the storm of higher costs related to infection control measures, and staffing and volume challenges,” says Clare Moylan, principal at Gibbins Advisors.
Looming Distress for Healthcare Organizations
However, moving forward these financial safety nets are receding. At the same time, expenses are at historic highs and providers continue to face pandemic-related staffing and volume challenges.
Gibbins Advisors believes these core conditions will drive financial challenges for many healthcare providers through 2022 and into 2023:
- Inflation and interest rate increases: Inflation is at a 40-year high (now 8.5% for the 12 months ended July 2022). This could impact senior living demand and property valuations. In skilled nursing, reports as of June 2022 suggest that the last 2 years of a “seller’s market” is beginning to cool.
- Chronic national nursing shortage: In some cases, healthcare providers are limiting admissions or suspending services due to an inability to safely provide care rather than demand challenges. Rural healthcare has been hit particularly hard by shortages.
- Significant labor cost increases: Providers are having to resort to traveling nurses and agency staff at costs more than three times that of employee rates. Kaufman Hall reported as of March 2022 that nationally, hospital labor expenses increased 37% from pre-pandemic levels.
- Supply chain and sourcing challenges: The effect of COVID-19 lockdowns in China on supply chains in the U.S. may be felt for many months to come.
- Limited ability to pass through cost increases. Government payors and health insurers may increase rates, but the increase is not likely to compensate for the level of cost increases seen in the last 12 months and there may be a lag.
“Healthcare organizations without adequate cash reserves to fund operating losses and debt service may face more difficulty in accessing capital in the current climate than the last two years, which can lead to more restructuring activity including bankruptcies” said Ronald M. Winters, Principal at Gibbins Advisors.
Sectors hit the hardest
Gibbins Advisors researched Chapter 11 bankruptcies for large healthcare organizations with liabilities over $10 million in the period from January 2019 to June 2022.
In the 18 months to June 2022, the majority (54%) of large healthcare bankruptcies related to the Senior Care (Skilled nursing facility, Senior living) sector. The next highest sector was Pharmaceuticals, with 10% of the case volume.
Meanwhile, where hospitals saw 16 cases in 2019 to 2020, there have only been three cases since 2021. Gibbins Advisors expects that to change.
“Hospitals are vulnerable to financial distress as COVID-19 protections fade away, Medicare accelerated and advance payments are recouped and massive cost pressures persist,” said Clare Moylan, Principal at Gibbins Advisors. “It will be important for providers to forecast cash flow and engage early with capital sources to secure any necessary support”.
For questions, comments or more information please contact Clare Moylan; email@example.com.