Blessings in Disguise: Hidden Opportunities in Health Care Bankruptcies
In 2016 alone, 21 hospitals were closed across the United States because of unsustainable financial performance1, and the trend has continued with 7 additional hospitals and 18 other hospital departments closing in just the first half of 20172. Financial challenges facing many entities in the health care industry are not limited to hospitals, or even a particular geographic region. From surgery centers to family practice groups, behavioral health providers to nursing homes, rural, urban, for-profit and non-profit alike, numerous health care organizations are struggling to survive as the health care industry undergoes a metamorphic shift in economics and operations.
The financial struggles of these health care organizations have continued despite a long history of industry growth far in excess of the broader rate of national economic growth. For example in 2016, spending on health care increased 6.2 percent3, while the rate of growth across all industries increased by only 1.5 percent4. While the myriad of changes to the health care industry over the past 10 years, in the form of a regulatory, financial reimbursement, technology, and patient demographics, have no doubt contributed to the challenges facing the health care industry, they do not in and of themselves, explain why, in an industry that is still growing four times faster than the rest of the economy, so many health care organizations are facing such daunting financial distress.
The answer most likely lies with the fact that for so long, the health care industry enjoyed rates of growth in excess of almost six times the rate of inflation, and since 2007, growth rates have steadily declined5. As a result, an industry that became structurally dependent upon unsustainable growth rates must realign its operations and business strategies to survive as reimbursement and growth inevitably return to more sustainable levels. With the changes in the health care reimbursement and regulatory environment, it is all but certain we will see an increase in the number of distressed health care entities over the next few years.
Far from doom and gloom, the realignment of the health care industry that is already underway, and is almost certainly to escalate, combined with unending need for health care, generates an outstanding opportunity for both financially stable organizations as well as those distressed entities that identify the need to reform before it is too late. With industry growth still at four times the national GDP, financially stable organizations will have the opportunity to acquire providers, networks, and assets that can facilitate continued growth, and distressed entities can take advantage of resources, such as bankruptcy, to restructure, reposition, and reinvent their operations for long-term viability.
In years past, the bankruptcy option was tagged as the remedy of last resort. But, in today’s world, bankruptcy means opportunity. Today’s health care playing field consists of a myriad of scenarios and combinations: for example: i) small hospitals are capital constrained; ii) big hospitals want to become small; iii) physicians want to be employees; iv) physician groups want to grow in specialty spaces. A bankruptcy can provide the necessary forum and mechanisms to resolve structure legacy issues, solve capital requirements, enhance financial stability and maximize value.
From any perspective, bankruptcy is not a badge of financial distress, but rather a business tool to use in revitalizing, restructuring, and accomplishing the goals management foresees or needs to anticipate. This may include effectuating a merger, a sale/purchase of assets or equity, a way to deal with regulatory issues and cumbersome leases or contracts, or what might be a straight-up restructure of debt and equity with new capital. In any case, the bankruptcy process can provide a safe haven from which a company can emerge with a clean balance sheet – the proverbial clean bill of health.
While financially distressed hospitals, physician practices, and other healthcare entities, present opportunities for financially stable organizations to expand their services and compete more effectively, distressed acquisitions in particular also generate risks unique to health care, which must be identified, understood and managed. These challenges include successor liability for regulatory compliance, fraud and abuse laws, (Anti-kickback statute, False Claims Act, and Stark Law) and Medicare and Medicaid overpayments. Furthermore, state licensing and certificate of need transfers may be complicated when a company being acquired has a track record of economic challenges. Depending on how dire the financial distress has become, the timeframe for conducting due diligence and financial modeling may also be significantly reduced. A skilled team planning for and assessing these transactions are key.
Whether your organization is doing well, or underperforming, there are significant opportunities in this uncertain time. Assembling a team of skilled legal, accounting and operational advisors will be necessary to surviving and thriving in the changing healthcare industry. Whether you are concerned about your organization’s financial sustainability, or are seeking opportunities to expand operations through acquisition of distressed entities, now is the time to develop strategies to maximize your organization’s goals.
1Ellison, Ayla, 21 Hospital Closures in 2016, Becker’s Hospital CFO Report, (January 6, 2017), available here.
2Ellison, Ayla, 7 Hospital Closures So Far in 2017, Becker’s Hospital CFO Report, (July 25, 2017), available here. See also, Ellison, Ayla, 18 Hospital Department Closures in 2017 so far, Becker’s Hospital CFO Report, (June 15, 2017), available here.
3See PWC Medical Cost trend: Behind the Numbers 2018 at 4 (June 2017). Available here.
4See Bureau of Economic Analysis Gross Domestic Product reports, available at: https://www.bea.gov/national/
5See PWC at 4. and Bureau of Economic Analysis Gross Domestic Product reports for 2007.