Large bankruptcies in the healthcare industry rose sharply from 2021 to 2022, jumping 84%, according to a new report from healthcare restructuring firm Gibbons Advisors.
In 2022, there were 46 large bankruptcies in the industry, consisting of Chapter 11 cases with more than $10 million in liabilities. The analysis showed that bankruptcies were at their worst toward the end of 2022, and the number of large healthcare bankruptcy filings in the final three months of 2022 was almost 3 times the number of filings in the first quarter of the year.
The findings underscore the challenging operating environment for healthcare organizations. While tough economic headwinds are impacting all industries, the healthcare space has been hit with higher costs, revenue changes amid a changing patient mix, loss of financial support from the government’s COVID-19 response and a significant labor crunch. Many major health systems and hospitals faced billions in losses in 2022. Additionally, some recent reports expect much of the same for 2023, though deal volume could see a rebound in the sector as healthcare companies shore up their assets and bottom line this year.
Bankruptcies in the first half of 2022 within the healthcare space were largely driven by senior care cases, according to Gibbons Advisors. In the second half, more bankruptcies stemmed from the pharmaceutical sector, mostly driven by a large spoke in the final three-month period of the year.
According to the report, bankruptcies in 2022 were a residual impact from the COVID-19 pandemic, dubbed the “Covid hangover.” Higher labor costs, a lack of COVID-19 funding, limited liability to pass on rising costs, lack of return on investments in the stock market, plus higher interest rates have all had a huge effect on bankruptcies.
“All these factors place a strain on cash flow and access to capital, and without a strong balance sheet such constraints are typically the reason behind companies filing Chapter 11 bankruptcy,” Ronald Winters, principal at Gibbins Advisors, said in a statement. “The hospital sector was particularly insulated from financial distress during the pandemic however those protections have ended and we are now seeing a lot of struggling hospitals, particularly rural and community hospitals.”
Within the pharmaceutical space specifically, the impact on capital markets has had a particularly huge effect, as many pharma and biotech companies rely on capital markets to fund their research and development and product launch costs, the report noted.
“The poor performance of the stock market in 2022 coupled with interest rate increases and high inflation have resulted in a tightening of access to capital, particularly for higher risk biopharma businesses,” explained Clare Moylan, principal at Gibbons Advisors.
To survive this hiccup in the markets, companies typically need significant reserves or pre-arranged access to capital to fund their operations. Companies with good clinical data, lean operations and a strategically balanced portfolio will be the winners in the space during a downturn.
Unfortunately, Gibbons Advisors predicts much of the same headwinds in 2023, which could be worsened by fears of a recession. Fortunately, the skyrocketing labor costs may see some relief this year as healthcare organizations shift away from more expensive contract labor. However, the pre-COVID-19 market factors still remain, including the shift from inpatient to outpatient/community-based delivery of healthcare.
“Financial distress will persist if not worsen in 2023 as financial buffers wear thin,” Winters said. “COVID-related support deferred this process, but margin squeeze and macroeconomic forces are driving the healthcare market toward consolidation given the enormous scale and depth of expertise you need to compete effectively."
Amy joined TriMed Media as a Senior Writer for HealthExec after covering home care for three years. When not writing about all things healthcare, she fulfills her lifelong dream of becoming a pirate by sailing in regattas and enjoying rum. Fun fact: she sailed 333 miles across Lake Michigan in the Chicago Yacht Club "Race to Mackinac."