Healthcare Bankruptcies Grew by 84% in 2022, Returning to 2020 Levels

The number of healthcare bankruptcies increased by 84 percent from 2021 to 2022, driven by rising costs, workforce shortages, and high interest rates, according to a report from Gibbins Advisors.

The analysis included Chapter 11 bankruptcy filings in the healthcare and medical sectors with over $10 million in liabilities.

The number of large healthcare bankruptcies grew from 25 in 2021 to 46 in 2022. This growth marked a return to 2019 and 2020 levels, when 51 and 45 healthcare bankruptcies occurred, respectively.

In 2022, there were 31 bankruptcies with liabilities between $10 million and $50 million, up from nine in 2019. Eight bankruptcies in 2022 had liabilities between $50 million and $100 million, two cases were in the $100 million to $500 million range, and five cases had liabilities over $500 million.

Healthcare bankruptcies progressed throughout the year, with the number of large bankruptcy filings in Q4 2022 (19 case filings) almost three times the number of filings in Q1 2022 (7 case filings). All five of the cases with liabilities over $500 million occurred during the second half of the year, the report noted.

Case filings in the senior care sector accounted for more than 35 percent of healthcare bankruptcies during the first half of 2022. However, bankruptcies in the pharmaceutical industry dominated the last two quarters, with cases spiking in Q4.

The hospital sector was the only one for which 2022 bankruptcy filings did not return to 2019 and 2020 levels. There were only two hospital bankruptcies filed in 2022, compared to ten in 2019.

According to Gibbins Advisors, healthcare bankruptcy activity will likely continue rising in 2023, given the unstable market conditions.

The COVID-19 pandemic has created significant and perhaps long-lasting financial challenges for healthcare organizations. Ongoing staffing shortages and supply chain issues have increased labor and supply costs, while COVID-19-related government funding has been depleted.

In addition, healthcare organizations are experiencing low returns on invested assets, a limited ability to pass through cost increases, and high interest rates.

“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 the press release.

“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.”

Meanwhile, the stock market’s poor performance in 2022, high interest rates, and inflation have impacted access to capital for the pharmaceutical sector, driving the increase in bankruptcies.

Pharmaceutical and biotech sectors rely heavily on capital markets to fund research and development and product launch costs, according to Gibbins Advisors.

Companies may have to consolidate in the upcoming year to access the capital they need to fund their operations and avoid bankruptcy, the report stated.

Financial challenges for the healthcare sector are expected to persist in 2023. As organizations increase pay and benefits to recruit and retain staff, there will likely be a new baseline on labor costs. Additionally, organizations may have to sell assets to provide cash flow due to poor investment returns.

“Financial distress will persist if not worsen in 2023 as financial buffers wear thin,” said Winters. “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.”