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Health care sector bankruptcy filings increased by 84% from 2021 to 2022

Written on Jan 18, 2023

A new analysis shows a sharp acceleration of bankruptcy filings in the health care sector including an increase of 84% from 2021 to 2022. 

Gibbins Advisors, a health care restructuring advisory firm, has followed up its August 2022 analysis of Large Health care Bankruptcies (Chapter 11 cases with greater than $10 million in liabilities) with a total snapshot of 2022. 

There were 46 large health care bankruptcies in 2022 included in the study. 

As evidence of the stark trend, the number of large health care bankruptcy filings in Q4 2022 was almost three times the number of filings in Q1 2022. 

Cases in the senior care sector dominated the first half of 2022, whereas the pharmaceutical sector dominated the second half of 2022, driven by a large spike in Q4 2022. 

While large health care bankruptcy filings in 2022 returned to levels at or above those seen 2019/2020 for most subsectors, the exception was the hospital sector, with just two large bankruptcy filings in 2022 compared to ten cases in 2019. 

Gibbins Advisors believes that market conditions indicate the acceleration in bankruptcy activity could continue through 2023. 

As Gibbins Advisors previously reported, the biggest drivers can be distilled down to a “COVID hangover” which has led to: 

  • Skyrocketing labor and supply costs driven by a nursing shortage and ongoing supply chain issues 

  • COVID-related government funding exhausted 

  • Limited ability to pass through cost increases 

  • Low returns on invested assets (S&P declined by ~20% in 2022) 

  • Interest rate increases (the Federal Reserve raised rates seven times during 2022) 

Pharmaceutical and biotech sectors rely heavily on capital markets to fund significant R&D and product launch costs. Companies can incur heavy losses for consecutive years before reaching profitability and/or developing assets that deliver an attractive return. 

For early-stage companies, equity (sometimes publicly traded) is usually the primary funding source, though some also have debt capital. 

“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” said Clare Moylan, principal at Gibbins Advisors. 

To survive, companies need significant reserves or pre-arranged access to capital to fund their operations. Those with good clinical data, lean operations and a strategically balanced portfolio will set themselves apart and stand a better chance of attracting the funding they need. Closely managing cost and cash flow in preparation for the long haul will be key to success. 

“Many will need to find a partner to access needed capital in order to avoid failure, so we expect to see continued consolidation in the next 12 months,” Moylan said. “There may be some good opportunities for savvy investors.” 

As the key drivers persist, financial distress in health care is expected to continue for the following reasons: 

  • Recession fears: Heading into 2023, fears of a recession continue to weigh on sentiment. The capital market constraints seen in late 2022 are expected to continue. 

  • New baseline on labor cost: While there appears to be some relief on labor cost pressure, potentially due to a shift away from more expensive contract labor (see Kaufman Hall Hospital Flash report, December 2022), increases in pay and benefits awarded to attract and retain staff are expected to set a new baseline on expenses for health care organizations. 

  • Pre-COVID macroeconomic factors remain unchanged: The impact of technology and the shift from inpatient to outpatient/community-based delivery of health care started decades ago, with COVID arguably accelerating the trend. While this creates challenges, it also creates opportunities for those who invest in the necessary transformation to remain relevant and efficient. 

  • Market returns: Health care providers that rely on investment returns to supplement operating losses may not have that lifeline in 2023, and instead may need to sell such assets (possibly at a loss) to provide necessary cash flow. 

  • Rate increases from payors will not likely meet cost inflation: The “margin squeeze” on health care providers is expected to continue, with those more reliant on government payors expected to be most challenged.