A recent Financial Times article about soaring U.S. healthcare bankruptcies might seem surprising. It reported that were almost five times as many 2023 Chapter 11 filings among large healthcare companies as in 2022.
But a quick review of the last few years shows that the problems have been growing in plain sight. This is potentially bad news for landlords as bankruptcy filings can leave creditors hanging out to dry, as WeWork's bankruptcy process has reminded.
"Bankruptcy affords the ability to cancel leases and cap the rejection damages the landlords can get," John Sparacino, a principal with McKool Smith's Bankruptcy Litigation practice area, previously told GlobeSt.com. "If there are many years left on a lease, the debtor can reject the lease "and damages are basically capped at one-year's rent."
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As the Financial Times noted about last year, "Eighteen companies with liabilities of more than $100mn, including radiotherapy and medical staffing services and a community hospital, filed for Chapter 11 bankruptcy protection, seeking court approval to reduce their debts."
In the list were "Envision, which was formerly owned by KKR, Brown Brothers Harriman's American Physician Partners (APP) and Akumin, according to an analysis of data by BankruptcyData.com, part of analytics group New Generation Research."
The reasons include regulatory pressure, falling patient numbers, the end of pandemic aid, labor shortages, and rising costs. Additionally, as the New York Times reported, a study in the Journal of the American Medical Association (JAMA) showed that the three years following private equity takeover of hospitals, "adverse events including surgical infections and bed sores rose by 25 percent among Medicare patients when compared with similar hospitals that were not bought by such investors." That could come with a rise in legal costs.
However, looking only at the biggest cases understates the extent of the problem that could face many landlords. In November 2023, Industry Dive, via its Healthcare Dive site, used data from BankruptcyData.com to find that more than 80 healthcare companies with liabilities of more than $10 million had already filed for bankruptcy year to date, whether Chapter 11, 7, 9, or 15.
Becker's Healthcare had previously reported 54 healthcare bankruptcies in 2022, as of Dec. 20 2022. That was out of 340 total company filings, so 15.9%. But in 2022, national healthcare expenditure was 17.3% of U.S. GDP, so maybe not that surprising.
Sai Balasubramanian, a doctor and lawyer as well as self-described healthcare strategy executive has written about the problem at Forbes. "Though healthcare has historically been perceived as an 'always in-demand' industry, the reality is that healthcare organizations have been equally impacted by razor thin margins, challenging workforce constraints and the results of oscillating economic headwinds," he said.
"Healthcare has historically been perceived as always in demand, perhaps inflation resilient," Steven B Smith, a partner at US law firm Herrick, Feinstein, told the Financial Times. "But in the pandemic you had low interest rates, lender concessions, government funding for healthcare providers, all those factors deferred some of the fundamental issues hitting the most fragile businesses."
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