When the COVID-19 pandemic struck in early 2020, many predicted that a crash in healthcare bankruptcies would ensue. So far, the opposite has happened.
Billions of dollars in federal, state and local aid that have flowed to healthcare providers has led to what law firm Polsinelli calls an “unprecedented” drop in Chapter 11 filings in an industry that is generally among the most in difficulty. In fact, Polsinelli’s second quarter report shows the lowest distress index on record in the healthcare industry since 2010.
It’s not just health care: Bankruptcies are on the decline across the economy, said Aram Ordubegian, partner in Arent Fox’s bankruptcy and financial restructuring group. The simple fact is that exiting stimulus spending takes distress out of the system – for now.
“The bubble is going to get bigger all the more and when the free money flow is off, we’re going to see the volume come back and we’re going to be busy,” Ordubegian said.
Congress approved $ 178 billion in grants for health care providers under the Coronavirus Aid, Relief, and Economic Security Act Provider Relief Fund, which was designed to help hospitals, practices and others to overcome the pandemic.
Providers also secured $ 100 billion in Medicare loans, then successfully lobby to delay repayment. The CARES law also offered other advantages, such as deferred taxes.
Polsinelli measures bankruptcies on a rolling four-quarter basis in the form of a distress index to eliminate data volatility.
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For healthcare companies, the distress index was 63 in the past four quarters ending June 30. This is even lower than in the fourth quarter of 2010, which Polsinelli uses as a benchmark for its analysis. This index is down by more than 333 points compared to the first quarter of 2021 and by more than 446 points compared to the second quarter of 2020.
The healthcare distress index had previously beaten the 2010 benchmark for 22 consecutive quarters before the end of last year, according to data from Polsinelli.
The influx of government spending is the reason, said Jeremy Johnson, a Polsinelli bankruptcy attorney who co-authored the report.
“It’s not like something fixed the health care system. They were just the beneficiaries of strong government programs that did, I think, exactly what they’re supposed to do to help these facilities through a mess. tough times, ”Johnson said.
Polsinelli’s results include all healthcare providers in contact with patients, such as hospitals, outpatient surgery centers, medical 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 second-quarter deposits were in the smallest asset pool, $ 1 million to $ 10 million, which typically includes the largest number of deposits. The share of deposits decreases in proportion to the size of the assets.
Almost 40% of healthcare providers’ 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 at the start of the pandemic, as struggling businesses delayed filing while waiting for the crisis to end.
This was especially true for healthcare providers, who are not allowed to raise government stimulus funds while they are bankrupt. At the height of the first wave of the pandemic in April 2020, bankruptcy lawyers predicted that deposits would be filed later that year once vendors spent all their stimulus money, but that didn’t work out. is not produced.
No one predicted that bankruptcies would take that trajectory, but then again, no one predicted the level of stimulus money that has poured into companies across all industries, Ordubegian said. Arent Fox’s customers typically include skilled nursing facilities and surgical centers, areas that seem to be keeping their heads above water for the time being.
“It helps these businesses that we like to call ‘zombie businesses’,” he said. “They stay alive when they should be dead.”
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