January 25, 2024

Gibbins Advisors, a leading healthcare restructuring advisory firm, has issued its latest report analyzing healthcare sector Chapter 11 bankruptcy cases filed from 2019 to 2023 for companies with more than $10 million in liabilities (“Healthcare Bankruptcy Filings”).

According to the report, there were 79 Healthcare Bankruptcy Filings in 2023 which made it the highest of the last five years, with the next closest being 2019 which saw 51 cases. Case volumes in 2023 were over 3 times the level seen in 2021 and over 1.7 times the level in 2022.

Large Healthcare Bankruptcy Filings with liabilities over $100 million surged in 2023, reaching 28 filings compared to only 7 in 2022 and 8 in 2021.

While the number of Healthcare Bankruptcy Filings increased across six consecutive quarters through Q3 2023, there was a decline from Q3 to Q4 2023. While the number of cases in the second half of 2023 approximate those in the first half of 2023, it is yet unclear if lower volumes in Q4 2023 indicate an emerging trend.

Senior care and pharmaceutical subsectors comprised almost half the total healthcare bankruptcy filings in 2023, consistent with previous trends.

Of particular note, hospital bankruptcy filings spiked in 2023 with 12 filings compared to a total of 11 filings from the prior 3 years combined.

What’s driving the increase in financial distress of healthcare organizations?

There are challenges ahead driven by sector-wide headwinds, but optimism may be on the horizon for some healthcare providers:

1) Capital market constraints:

• Softening of interest rates expected in 2024 but refinancings, access to capital, valuations and transactions are still impacted by relatively high rates.
• New requirements of FTC and state anti-trust protections may limit strategic options.

2) Labor and Supply Cost Pressures

• Large cost increases over the past 2 years have set a new baseline, creating a margin squeeze.
• Agency labor settling down in some markets, but workforce headwinds continue and possible federal mandates for minimum staffing ratios would compound the challenges.

 3) Revenue Pressure

• Payment rate increases often not in line with cost inflation.
• Material increase in denials from payors, especially Medicare Advantage.
• Unwinding of Medicaid Continuous Enrollment during 2023 may materially increase the number of uninsured patients.

4) Possible Optimism

• Mixture of rate and volume increases may be expected in 2024, but costs will likely remain a challenge, and smaller organizations with revenue under $500 million may fare worse than larger health systems.
• COVID-19-related Federal Emergency Management Agency (FEMA) funds may be available as one-time grants.

5) Continuing shift to out-of-hospital care delivery

• Care is moving from hospitals and skilled nursing facilities to outpatient, community and home-based settings, creating both opportunities and headwinds.

“We saw a dramatic increase in healthcare bankruptcy filings in 2023, continuing the trend which began in mid-2022” said Clare Moylan, Principal at Gibbins Advisors. “Key observations from 2023 are the return of large bankruptcy cases with over $100 million in liabilities, and a spike in hospital filings, both of which appear to primarily be a result COVID-19 pandemic-related protections ending.”

“Some of the recent data was surprising” said Tyler Brasher, Director at Gibbins Advisors. “Total healthcare filings spiked in Q3 and then receded in Q4 2023, and there were no senior care bankruptcies filed in Q4 2023 when we expect to see about 5 per quarter. We will closely monitor in 2024 to see if the market is changing”.

What does Gibbins Advisors predict for 2024?

“Despite the absence of senior care bankruptcy filings in Q4 2023, based on our knowledge of the market we expect to see senior care bankruptcies return in 2024” said Brasher. “As for total case volume, we are seeing a lot of distress in healthcare as the market remains very challenging for providers, so we expect to see continued levels of healthcare bankruptcies in 2024 that we saw last year.”

“As we anticipated, restructuring activity in the hospital sector increased markedly in 2023 and we expect to see a continuation of that level of distress this year as hospitals, particularly rural and standalone hospitals, work through challenging profitability, liquidity and leverage dynamics,” said Moylan.

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