Hospital Bankruptcy Surge Looms as Virus Rages, Stimulus Lapses

Hospitals and other health-care providers are bracing for a bankruptcy wave as the government stimulus aid that gave a lifeline to the industry dries up.

Even before the Covid-19 pandemic, providers were pushed to their breaking points, especially those in rural areas. At least 30 hospitals entered bankruptcy in 2019, and at least three dozen have done the same so far this year, according to data compiled by Bloomberg.

Chapter 11 filings had been poised to go higher with the coronavirus inflating costs for protective equipment and impeding revenue-generating elective procedures. The CARES Act and accelerated Medicare advance payments helped to forestall the anticipated increase.

The stopgap assistance allowed struggling hospitals to stay out of bankruptcy and remain open for patients, said health-care transactions lawyer Bobby Guy of Polsinelli PC.

But Congress and the Trump administration have been unable to agree on further coronavirus relief, and health-care bankruptcies and out-of-court restructurings could accelerate early next year, attorneys say.

“If there’s not more stimulus, we’re going to see a lot of cash crunches,” Guy said. “The bill will come due.”

Industry in Crisis

Healthcare sectors have been in upheaval for years as reimbursement rates have fallen, the cost of care has increased, and rural populations have declined.

Polsinelli’s quarterly “distress index” that tracks health-care bankruptcy filings has exceeded a 2010 benchmark in every quarter since the latter half of 2015. The firm’s most recent report shows that distress in the industry is more than five times what it was in 2010 when Polsinelli began tracking, Guy said.

Thomas Health System Inc. and its two West Virginia hospitals went bankrupt in January. Quorum Health Corp., the operator of two dozen rural and mid-size market hospitals, filed for Chapter 11 in early April.

The American Hospital Association estimates that the nation’s hospital and health systems will report $323 billion in net loss this year, due in large part to lower non-Covid patient volumes.

Federal coronavirus stimulus packages kept an earlier bankruptcy wave at bay by handing hospitals and healthcare providers $175 billion to cover expenses or lost revenue this year. The government also distributed $100 billion in emergency Medicare advancement loans.

“In some respects, more than any other industry, health care has really been propped up by stimulus money,” said Haynes and Boone LLP attorney Matt Ferris. “You had those types of providers that really had zero revenue for a few months.”

Struggles Continue

But “the pre-pandemic stresses come back” when the stimulus money starts to slow down, said Andrew Sherman, bankruptcy practice co-chair at Sills Cummis & Gross PC. “Those same issues are going to come to light, and maybe even worse post-pandemic.”

Rural hospitals in particular are going to continue to struggle, as will senior living centers, Ferris said.

“There’s a world of haves and have nots,” said attorney Sam Maizel, who specializes in health-care restructuring at Dentons LLP. Large private hospitals generally have been doing well, while small rural hospitals “live hand to mouth” and lack the resources to sustain themselves, he said.

“That’s been horribly exacerbated by Covid-19,” he said.

Even with additional funding that may come from Congress, it doesn’t change the underlying causes of distress, said Cynthia Romano, a global director of restructuring at CohnReznick LLP.

“In the short term, I don’t think it matters which party is elected,” she said.

Staving off Bankruptcy

The emergency cash infusion temporarily rescued some providers that would have gone bankrupt even without the pandemic.

A distressed small critical access hospital looking for a buyer, but the company put those plans on hold after receiving $1 million in government aid, according to Tim Gary, CEO of consulting firm Crux Strategies , referring to Crux’s discussions with the hospital.

Several facilities “were on the edge before this all started,” but stimulus funds helped them stay in business, he said.

But that funding wasn’t a cure-all.

New Hampshire hospital group LRGHealthcare received a $5.25 million state loan in April and about $15 million from the CARES Relief Fund.

The company filed for bankruptcy Oct. 19.

Government funding allowed the company to keep its doors open while running at 80% of pre-pandemic revenue. But persistent liquidity problems jeopardized its chances of staying in business “without a cash infusion or finding a partner to take-over the venture,” it said in court papers.

LRGHealthcare likely won’t be alone.

“I call it being in the blender, and it’s waiting for someone to push the button,” said bankruptcy attorney Carolyn Johnsen of Dickinson Wright PLLC.