August 14, 2024

Gibbins Advisors, a leading healthcare restructuring advisory firm, has released its Interim 2024 Report analyzing healthcare sector Chapter 11 bankruptcy cases filed from January 1, 2019 through June 30, 2024 for companies with more than $10 million in liabilities (“Healthcare Bankruptcy Filings”). The Report contains a new analysis of cases by ownership type, identifying companies that were backed by private equity firms (“PE-backed”), privately held, publicly traded or non-profit around the time of filing bankruptcy.

After accelerating to a spike in Q3 2023, Healthcare Bankruptcy Filings have slowed over the subsequent three quarters through Q2 2024. While there were 79 cases filed in 2023, based on the current run rate (calculated by annualizing six months of cases filed through June 30, 2024) 2024 is on track to see 58 cases, which would be a decline of 27%.

A closer examination of filings by case size shows that the decline in case volumes is largely driven by middle-market companies, which the study defined as those with liabilities ranging from $10 million to $100 million. In contrast, bankruptcy filings of very large healthcare companies, those with liabilities exceeding $500 million, remain at the elevated levels seen in 2023.

The data also highlights trends within various healthcare subsectors. Senior Care and Pharmaceuticals remain predominant, together comprising nearly half of all Healthcare Bankruptcy Filings. However, certain subsectors are seeing higher rates of bankruptcy filings:

• Clinics & Medical Equipment: Filings from clinics and physician practices have surged, trending 60% higher in 2024 based on cases filed through June 30. Medical equipment bankruptcies have shown a steady upward trajectory since 2021.
• Hospitals: Notably, only one hospital company, Steward Health Care, filed for bankruptcy in the first half of 2024, with 31 hospitals under the company’s umbrella.

Research by ownership type reveals that over the past five years, 45% of Healthcare Bankruptcy Filings were privately held debtors (excluding PE-backed), followed by publicly traded (24%), non-profit (17%), and PE-backed (14%). Non-profit cases focused on senior care and hospitals, while publicly traded cases were prominent in pharmaceuticals. PE-backed bankruptcies featured across the spectrum of healthcare subsectors, with the highest subsector concentration in medical equipment and supplies. There were no non-profit debtors with more than $500 million in liabilities as the very large cases were typically PE-Backed or publicly traded companies.

Is the decline in bankruptcy filings a good sign for the healthcare sector? 

While a decline in Healthcare Bankruptcy Filings appears to be a good sign, it doesn’t necessarily mean that financial challenges in the healthcare sector have abated. Since the research tracks bankruptcy filings, it does not include restructuring efforts taking place outside of a bankruptcy forum.

The healthcare sector continues to face financial headwinds, with some subsectors under increasing pressure, and some organizations better equipped to confront those challenges than others. Examples of distress drivers include:

Capital market constraints – a continued high interest rate environment is impacting access to capital and transactions. Further, increased scrutiny by the FTC and state regulators on anti-trust matters is limiting strategic options for healthcare providers and payors.

Cost increases and labor shortages – Expense increases squeezed margins. Healthcare workforce shortages to persist (and worsen) in the next decade, particularly rural areas.  Long term care facilities impacted by the new CMS minimum staffing rule.

Pressure from payors: Rate increases lag and are not always in line with cost inflation. Medicare Advantage denials are impacting providers. Many providers have little negotiating leverage with commercial or managed care payors and none with pure government payors.

Unwinding Medicaid Continuous Enrolment: As of June 14, 2024 at least 23 million people disenrolled nationally, increasing the risk of uncompensated care or interruption in reimbursement for providers.

Possible Optimism for Margin Growth: Operating margin improvements in hospitals as of YTD May 2024, but there is a widening gap between higher and lower performers, with smaller and rural providers most at risk.

Macroeconomic forces shifting care delivery: Care continues to move outside of the institutional setting, creating enormous business model challenges for many healthcare providers, yet opportunities for others.

What does Gibbins Advisors predict for the rest of 2024?

“The trend of lower bankruptcy volumes is not resonating with the amount of financial distress we are seeing in our practice” said Clare Moylan, Principal at Gibbins Advisors. “A possible reason could be financial restructuring taking place out of court rather than in bankruptcy. We wouldn’t be surprised if the case volumes increased from current levels as the year progresses.”

“The very large bankruptcy cases with liabilities over $500 million include sizeable healthcare enterprises, so when you see six such cases filed year to date, that represents a much bigger number of healthcare facilities” said Ronald Winters, Principal at Gibbins Advisors. “We are seeing elevated financial distress in nursing homes, senior living, pharmacy, physician practices and rural and standalone hospitals…strained by legacy debts, cash shortages and profitability challenges.”

For questions, comments or more information, contact Clare Moylan: cmoylan@gibbinsadvisors.com