Key Points
- During the first half of 2024, nine private equity-owned healthcare companies have filed for bankruptcy, comprising 23% of all large US healthcare bankruptcies so far this year.
- Some other private equity-owned healthcare companies have also defaulted on their debt but avoided bankruptcy court through distressed debt exchanges. At least six major healthcare companies have completed distressed exchanges this year.
- Many more private equity-owned healthcare companies are highly leveraged and considered at high risk for bankruptcy, including multiple companies that have taken on debt to finance payouts to their private equity owners.
Private equity firms, which characteristically use excessive debt and aggressive financial strategies, are key drivers in a recent wave of healthcare bankruptcies in the US, threatening the stability of essential healthcare services across the country.
In our April report, PESP found that at least 17 (21%) of the 80 large healthcare companies that filed for bankruptcy last year were owned by private equity firms.
This trend has continue in 2024. In the first six months of this year, PESP has tracked at least nine bankruptcies by companies that were private equity-owned, which accounts for 23% of all healthcare bankruptcies filed this year.
On top of that, there have been at least six more defaults by PE-owned healthcare companies (where the companies managed to restructure their debt outside of bankruptcy court).
The rise in healthcare bankruptcies, and bankruptcies by private equity-owned healthcare companies in particular, stems from a few factors. Private equity firms routinely use much higher levels of debt than other companies, often the result of leveraged buyouts and aggressive debt-funded growth strategies.
Private equity owns or recently owned companies that accounted for three of the four largest healthcare bankruptcies of the year so far, where the companies’ total liabilities exceeded $1 billion: Consulate Health Care, Steward Health Care, and Cano Health.[13]
Not included in that list is Careismatic Brands, a medical scrubs manufacturer owned by Partners Group that also had a >$1 billion bankruptcy,[14] but is classified within the consumer discretionary market rather than healthcare.[15]
Some private equity firms even add additional debt to their portfolio companies to fund shareholder payouts, known as “dividend recapitalizations.” Just last month, private equity-owned medical debt collector Ensemble RCM took out an over $800 million loan to finance a payout to its private equity owners.[1]
Private equity’s aggressive use of debt leaves companies more vulnerable to changing market conditions, including high interest rates and rising labor costs.
Private Equity Bankruptcy Trend Has Continued in 2024
Of the 40 large healthcare companies that have filed for bankruptcy so far this year (January-June 2024), nine companies are or were recently backed by private equity, accounting for 23% of the total filings.[2]
Most of the bankruptcies are filed as Chapter 11, which allows for a financial reorganization over time to allow the PE to survive. However many PEs in Chapter 11 proceed to Chapter 7 (a complete liquidation of all assets) In any case the entity is in the hands of a trustee who will make decisions on the PE's ability to meet the Chapter 11 bankruptcy or proceed to a Chapter 7 liquidation
To make matters worse PEs often borrow to pay shareholder dividends, to eliminate shareholder exits.
Any entity considering relief from a private entity should evaluate the buyer, its track record, financial statements, and history of previous acquisitions.
The makeup of PEs varies, from larger Venture Capital investors to smaller non-financial firms. Firms may include individual hospitals, clinics, or smaller groups of interested competitors.. This group may include competitors who want to increase their market share to improve their value to insurers by expanding their coverage area.
Physician Involvement
Neophyte physicians should examine the financial health of their proposed employer. They must avoid distressed entities such as group practices clinics and hospitals. Should the entity file for Chapter 7 many physicians could face loss of income and a forced move. Non-partners face the risk of termination, while partners may face liabilities for Chapter 7. This is good. reason for having a personal Chapter S to shield themselves from personal liability.
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