Healthcare Sector Bankruptcy Filings Surge in 2023, Trending to Triple the Levels of 2021

Gibbins Advisors, a leading healthcare restructuring advisory firm, has issued its third report analyzing Healthcare and Medical sector Chapter 11 bankruptcies with more than $10 million in liabilities.

According to the report, healthcare bankruptcy filings in the first six months of 2023 are trending materially higher than historical filings, with 40 bankruptcies filed through June 2023 compared to 46 filings in the full year of 2022. In 2021 there were just 25 filings. In 2020 there were 45, and in 2019 there were 51.

If trends continue at this annualized rate, the market could see 80 healthcare bankruptcy filings in 2023, eclipsing the last two years combined. That would be a 74% increase from 2022 and three times the level seen in 2021.

The acceleration in bankruptcy filings throughout 2022, especially the uptick seen in Q4 of 2022, has continued into 2023 with an average of 20 cases filed in each of the last three quarters through June 2023. That compares to a quarterly average of 9 cases in the three quarters through September 2022.

Large healthcare bankruptcy filings with more than $100 million in liabilities sharply increased in the first half of 2023. In just six months, 13 cases were filed, nearly matching the 15 total cases from 2022 and 2021 combined. Five of those 13 bankruptcies were cases each with more than $500 million in liabilities.

Since 2019, senior care and pharma combined have made up about half of healthcare bankruptcy case volume, and that has remained consistent in the first half of 2023. Hospitals, clinics and physician practices constitute about 21% of filings. Hospital cases are returning to relevance, with six hospital filings in the last 12 months, compared with just five filings in the preceding 24-month period.

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

As the key drivers persist, financial distress in healthcare is expected to continue:

• Capital market constraints
  • Interest rates are at their highest levels in 15 years, which is impacting borrower cash flow, refinancing ability, asset valuation and transactions.
• Labor and supply cost pressures
  • Increases in pay and benefits to attract and retain clinical staff and reduce contract labor have set a new, higher baseline for expenses.
  • Inflation on non-labor cost (e.g., supplies, utilities, food, drugs, insurance) has often exceeded expectations, putting pressure on budgets.
• Rate increases from payors will not likely meet cost inflation
  • The "margin squeeze" on healthcare providers is expected to continue, particularly for providers reliant on government payors.
  • For providers reliant on out-of-network billing, the "No Surprises Act" which started January 1, 2022 is having an impact.
• Macroeconomic forces shifting care out of an institutional setting
  • COVID-19 arguably accelerated the long-term trend of care shifting from inpatient to outpatient- and community-based settings, creating both opportunities and headwinds.
• Unwinding of Medicaid Continuous Enrollment may have a material impact
  • Pandemic-related protections on continuous Medicaid enrollment expired this year, with estimates that between 8 million and 24 million people will lose coverage (per KFF), though many will re-qualify.
• Market returns
  • While the stock market rebounding in 2023 has helped providers that rely on investment returns, they may still need to sell such assets or dip into cash reserves to provide necessary cash flow.

"Since mid-2022 we've seen interest rates increase to the highest level they have been in 15 years" said Clare Moylan, Principal at Gibbins Advisors. "While this has put pressure on cash flow for those highly levered with floating rate debt, it also impacts restructuring options because it means expensive short term funding, higher thresholds for refinancing, lower valuations and more difficulty obtaining finance to fund transactions".

"During the pandemic years, government funding for healthcare providers, lender concessions and very low interest rates created a relatively capital-rich environment" said Ronald Winters, Principal at Gibbins Advisors. "These factors deferred fundamental issues facing many smaller and rural healthcare providers which are now once again facing a real reckoning of their business model, and it comes at a time when the transaction environment is also challenging".

What does Gibbins Advisors predict for the rest of 2023 and into 2024?

"As has long been the trend, we expect continued distress and market consolidation in senior care as well as pharma and biotech," said Moylan. "Moving forward, we expect to see more restructuring activity in the hospital sector, particularly in rural and standalone hospitals, given the continued margin squeeze, cash reserves, Medicaid disenrollment, and long-term macroeconomic trends. Further, the "No Surpises Act" is having a material impact on providers reliant on out-of-network activity, so we may see more distress driven from those regulatory changes."