When the COVID-19 pandemic hit in early 2020, many predicted a crush of healthcare bankruptcies would follow. So far, the opposite has happened.
Billions of dollars in federal, state and local aid that’s flowed to healthcare providers has led to what the law firm Polsinelli calls an “unprecedented” drop in Chapter 11 filings in an industry that’s typically among the most distressed. In fact, Polsinelli’s second quarter report shows the lowest ever recorded distress index in the healthcare industry since 2010.
It’s not just healthcare: Bankruptcies are down economy-wide, said Aram Ordubegian, a partner in Arent Fox’s bankruptcy and financial restructuring group. The simple fact is that the outflow of stimulus spending is squeezing distress out of the system—for now.
“The bubble is going to get that much bigger and when the free money flow gets turned off, we’re going to see volume back and we’re going to be busy,” Ordubegian said.
Congress approved $178 billion in grants for healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act’s Provider Relief Fund, which was designed to help hospitals, medical practices and others weather the pandemic.
Providers also got $100 billion in Medicare loans and then successfully lobbied to delay the repayment deadline. The CARES Act had other perks, too, like deferred taxes.
Polsinelli measures bankruptcies on a trailing, four-quarter basis in the form of a distress index to eliminate volatility in the data.
For healthcare companies, the distress index was 63 in the trailing four quarters ending June 30. That’s even lower than in the fourth quarter of 2010, which Polsinelli uses as the benchmark for its analysis. That index is down more than 333 points from the first quarter of 2021 and down more than 446 points from the second quarter of 2020.
The healthcare sector’s distress index had previously exceeded the 2010 benchmark for 22 consecutive quarters before the end of last year, the Polsinelli data show.
The influx of government spending is the reason, said Jeremy Johnson, a Polsinelli bankruptcy attorney who co-authored the report.
“It’s not like anything fixed the healthcare system. They were just the beneficiaries of strong government programs that did, I think, exactly what they are supposed to do to help these facilities through a difficult time,” Johnson said.
The Polsinelli findings include all patient-facing healthcare providers, such as hospitals, ambulatory surgery centers, physician clinics, behavioral health clinics and skilled nursing facilities.
Polsinelli’s report only includes Chapter 11 filings for companies with assets exceeding $1 million. Among healthcare providers, half of the second quarter filings were among the smallest asset group, $1 million to $10 million, which typically comprises the most filings. The share of filings declines proportionately to asset size.
Almost 40% of healthcare provider bankruptcy filings in the quarter were in the Southeast, Polsinelli found. The Midwest was the second highest region for bankruptcy filings at 21%, followed by the Southwest at 13%.
Bankruptcy filings were also down early in the pandemic as distressed companies held off on filing while they waited out the crisis.
The was especially true for healthcare providers, which aren’t allowed to collect government stimulus money while they’re in bankruptcy. At the height of the pandemic’s first wave in April 2020, bankruptcy attorneys predicted the filings would roll in later that year once providers had spent all their stimulus money, but that didn’t happen.
No one predicted bankruptcies would take this trajectory, but then again, no one predicted the level of stimulus money that has flowed to companies across all sectors, Ordubegian said. Arent Fox’s clients typically include skilled nursing facilities and surgery centers, sectors that seem to be keeping their heads above water for the time being.
“It helps these companies that we like to call ‘zombie companies,'” he said. “They’re staying alive when they should be dead.”