Tackling distress in the US healthcare sector


Financier Worldwide Magazine

October 2017 Issue

FW moderates a discussion on tackling distress in the US healthcare sector between Marshall Glade at GlassRatner, Felicia Gerber Perlman at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates and Ana Alfonso at Willkie Farr & Gallagher LLP.

FW: How would you describe the level of bankruptcy filings in the US healthcare sector over the past 12 months or so? What does this tell us about the extent of distress the sector has been experiencing?

Glade: During the first half of 2017, we saw a slight increase in healthcare bankruptcies year over year compared to the first half of 2016. The basic fundamentals have not changed between 2016 and 2017, but operating a healthcare company continues to be more difficult with many healthcare firms burning through cash reserves. Distress in this sector is across the board from hospitals to pharmacies to skilled nursing facilities. Reports indicate up to 15 percent of GDP relates to healthcare services, so it appears there should be no shortage of money in the system; however, it is becoming increasingly difficult for small to mid-size service providers to compete in this sector.

Perlman: While the number of healthcare filings have remained relatively steady over the past few years, they now comprise a greater percentage of the total number of bankruptcy filings. The number of filings in 2017 is on the rise and to date there have been over 80 bankruptcy filings in the broadly-defined US healthcare sector. There are other indicators of distress in the healthcare industry beyond the number of bankruptcy filings. For example, according to at least one source, the number of distressed M&A deals in the US involving healthcare providers increased by over 85 percent from 2013-2014 to 2015-2016. Moreover, the aggregate number of rural hospital closures has increased each year since 2010 – a trend that is expected to continue – reflecting the impact that declining reimbursements rates, market competition from urban facilities, physician shortages and limited access to capital are having on rural independent hospitals.

Alfonso: Apart from the occasional community hospital or large, troubled name, we are not seeing many healthcare companies in bankruptcy proceedings right now. Certain industry fundamentals have been under pressure for years, but the level of restructuring activity has yet to pick up significantly. That does not mean the distress level is not serious, it just means these companies are not choosing to file bankruptcy right now and are not at a point of being forced to file bankruptcy. The reality is that bankruptcy is not always a solution for companies in this industry. Management teams tend to view bankruptcy as a last resort.

FW: What are some of the driving factors behind recent distress in the US healthcare sector? How do these break down into company size, location and segments of the industry?

Perlman: A number of factors have contributed to the high level of distress across the healthcare industry. First, there has been uncertainty related to the ACA and its potential repeal. Second, there has been a systemic shift from volume-based to value-based reimbursement schemes, which has caused reimbursements to change from fee-for-service reimbursement to bundled payments where a provider receives a fixed payment for the entire spectrum of care irrespective of length of stay or number of procedures. Third, payer-led demand to decrease costs has shifted the delivery of healthcare from acute, inpatient care to outpatient care and resulted in overcapacity in inpatient facilities. Fourth, there have been changes in the availability of reimbursements from both private insurers and government payers. Fifth, there has been pressure to increase investments in equipment and technology, including electronic health records systems. Finally, heightened competition has increased consolidations to drive economies-of-scale for larger competitors. In particular, distress levels have especially impacted rural hospitals and senior-assisted living sectors, especially in the Southeast US.

Alfonso: In general, the continuing evolution of the regulatory regime in which healthcare businesses operate is a contributing factor. Some of the other drivers are more sector-specific. Small community hospitals are particularly challenging to restructure because fixing the balance sheet of a ‘safety net’ service provider is such a delicate and complex task. Those that have not partnered with a larger hospital network are the most at risk. Skilled nursing is under significant pressure because of demographic changes – the growth and prevalence of home healthcare options means there are fewer patients in nursing facilities than what the industry anticipated. The patients who ultimately wind up in nursing homes are spending less time there. Laboratories and behavioural health providers are under scrutiny from regulators like CMS and commercial payors that are tightening their treatment, documentation and payment protocols. The growth of the opioid crisis has been a catalyst for the stricter scrutiny of billing and clinical practices since more people are using their insurance for behavioural health benefits. Many providers underestimated the speed with which these commercial payors would transition to tighter payment models and are now struggling to adjust to this new normal.

Glade: One of the major issues causing distress in the hospital space is lower operating margins caused by a decrease in profitable procedures. Many of the more traditional profitable outpatient procedures that were performed in a typical hospital setting are now performed in outpatient specialty clinics. These profitable procedures were able to prop up the less profitable areas of a hospital. The larger hospital systems are able to manage this situation through the acquisition of outpatient specialty clinics; however, smaller hospitals are unable to affect these types of transactions. Additionally, the costs of providing services have increased. Hospitals are spending more dollars on IT and cyber security to protect their electronic medical health records, higher malpractice premiums and increased medical professional salaries. This increase in costs has not been offset by a corresponding increase in revenues.

Certain industry fundamentals have been under pressure for years, but the level of restructuring activity has yet to pick up significantly.
— Ana Alfonso

FW: To what extent has uncertainty surrounding the possible repeal and replacement of the Affordable Care Act (ACA) impacted the sector, and led to potential or actual bankruptcy scenarios?

Alfonso: Uncertainty around the ACA has not led directly to many bankruptcy filings. If anything, the never-ending political wrangling over the fate of the ACA has dampened deal activity by making it hard to analyse pro forma capital structures. The uncertainty has also facilitated a lot of amend and extend activity, which has enabled management teams to kick the can while they wait for certainty.

Glade: With uncertainty comes an inability to make decisive decisions regarding the direction of your healthcare facility. According to a report from health economics firm Dobson DaVanzo, hospitals would take a $165bn loss if the ACA were repealed without replacement. This is one example of the threats that many community hospital executives face as they try and position their institutions. So, combined with the shift from inpatient to outpatient care and declining reimbursement and rising costs, the hit that hospitals would take with a potential ACA repeal would have obviously impacted their decisions. Community hospitals already operate on thin margins and adding the burden of further loss of revenues has caused many to consider options that include major retooling, for example converting a hospital to an urgent care centre only, to bankruptcy or to try and reorganise debt or liquidation.

Perlman: The uncertainty exacerbates the financial pressures already present in the industry. Current trends are unlikely to revert even if the ACA is replaced. For example, under the ACA, insurers have moved away from volume-based reimbursement toward value-based reimbursement, often reducing reimbursements for providers. Further, under the ACA there has been a shift from inpatient care to outpatient care to reduce cost. In addition, uncertainty regarding ACA’s replacement has led some insurers to leave the exchanges or increase premiums. Higher premiums and fewer choices will lead to an increase in uninsureds, causing further financial pressures for healthcare providers. These financial challenges have led to consolidation as providers look to achieve economies of scale and gain negotiating leverage with insurers. Some hospitals have merged to avoid a bankruptcy filing. In other cases, a hospital has filed for bankruptcy and been acquired by a competing hospital.

FW: What strategies can struggling healthcare companies deploy to help them avoid bankruptcy and turn around their business? Is it fair to say that boards and executives often do not appreciate how critical their situation is until it is too late?

Glade: In most circumstances, a distressed situation is recognised too late. Often we are in a position to tell parties that we could have had a different outcome if you had just called six months ago. Nevertheless, one of the first strategies is to implement a fresh look at the profitability of each of the company’s offerings. In the case of a hospital, it may offer outpatient surgeries, cancer treatments, a women’s centre and behavioural health services. Each component needs to have a thorough review and a determination needs to be made regarding its profitability. This type of review can be difficult for a hospital to undertake, since many times the board of directors and management’s focus are not simply financial, but also making sure medical care is provided for the surrounding community. The board of directors and management need to develop an understanding that by discontinuing one unprofitable segment, they are actually allowing for continued care in the community by making sure the other services can be offered for the long term. Board members are often retired physicians and community leaders; typically they do not have the expertise to recognise financial problems at an early stage.

Perlman: There are numerous strategies that healthcare providers can undertake. First, strategic acquisitions, merger or divestitures. Acquisitions or mergers, particularly those that increase market share in a geographical region, can give providers a competitive advantage. It can result in economies of scale and give parties more negotiating leverage with payers. Selling or closing facilities that are not part of the core business can reduce debt loads and costs. Second, investment in outpatient facilities. Urgent care centres and standalone ambulatory care centres have grown at a rapid pace in recent years in response to demand from payers to decrease costs and from consumers for convenient and affordable care. Third, assessing capital structure and alternative financing opportunities. Healthcare providers may determine whether to take on additional debt to finance expansion or strategic investment, or to retire older or costlier debt. Finally, retaining professionals. Healthcare providers may consider hiring experienced professionals, including restructuring professionals, to help assess strategic alternatives.

Alfonso: Healthcare providers can try to tap into the financial markets and raise capital needed to execute a turnaround plan. If the company has a good turnaround plan or there is other intrinsic value in the assets or business, there are currently a number of interested ‘alternative’ capital providers looking to invest in the industry. It is important for a struggling healthcare company to do this now and not assume a capital raise or refinancing will always be an option. Sometimes boards and executives do not fully appreciate how quickly things can go wrong, how quickly liquidity projections can turn and how quickly alternative financing sources can disappear, especially in the healthcare industry.

Successful restructurings in the healthcare industry typically result from advance planning and cooperation with state and federal regulators.
— Felicia Gerber Perlman

FW: In your experience, do distressed US healthcare companies need to address a combination of operational and financial issues? Are the necessary resources – such as access to debt financing – available to support them?

Perlman: Healthcare companies need to address both financial and operational issues. The financial pressures include reductions in reimbursements, potential increase in uninsureds if ACA is repealed and the need to invest in ever changing technology, including electronic health records. Further, while some believe that rising hospital debt is sustainable, providers have to consider their debt loads as these uncertainties and pressures persist. Healthcare companies also face operational challenges. For example, advancements have led to shorter recovery periods and the rise of outpatient facilities. Therefore, many hospitals have excess bedding and an unsustainable physical infrastructure. Further, as the industry consolidates, larger providers gain a competitive advantage in economies of scale and reimbursement rate negotiations. Depending on the organisation, many financing sources are available, including loans, municipal bond issuances, loans and grants under the USDA Rural Development Community Facilities Program, and the New Markets Tax Credit available to hospitals serving low-income communities.

Alfonso: The operational and financial issues for these companies are interrelated. Leveraged capital structures are under pressure because of market trends and reimbursement rate pressures. Skilled nursing facility operators need to address the fact that they are losing volume and manage their cost structures around the value-based payment regime. If they cannot operate in the current environment and handle their debt service, refinancing with multi-tiered debt is an option to consider. In general, there is still significant liquidity in the market from alternative capital sources. A company that has a good, credible story to support its turnaround plan can find capital at the right level in the structure, such as junior debt. But that capital tends to be expensive, so thought needs to be given as to whether the cost of new capital is worth the additional runway it buys the company.

Glade: From our experience in community hospitals, there is a definite need for operational improvements. The facilities typically have inadequate accounting and billing functions which will cause significant issues surrounding cash collections and reimbursements. Additionally, there is minimal insight into current and projected cash positions. In one circumstance, the board and management did not realise cash had diminished to the point of a 10-day cash reserve. Many times community hospitals are state-created taxing districts where the board is appointed by the governor. These boards usually do not have much, if any, healthcare experience. The healthcare industry, and hospitals in particular, require experienced, strong leadership. This is a highly complicated, highly regulated industry that needs sophisticated management to develop well thought out direction and strategy. As far as debt financing or financing in general, there will always be the haves and have-nots. Strong earnings and profitability always allows for easy financings; weak earnings and a lack of profitability are very difficult to finance.

FW: For those healthcare companies that undertake formal bankruptcy proceedings, what options are typically available to effect a reorganisation and emerge intact?

Alfonso: Handing the keys to lenders in a standalone reorganisation is one option. Another option is selling assets in 363 sales. The logical acquirers in a 363 sale might be interested parties, such as a sale of the organisation to its doctors, an equity sponsor or a strategic investor.

Glade: There is always the advantage of an automatic stay that stops the actions of creditors. However, in addition to that action, there is the advantage of speed. Many times a healthcare bankruptcy requires the participation of federal, state and local government agencies. A bankruptcy filing will garner significant public interest. Often this will put pressure on local politicians and allow for quicker approval processes. Additionally, there is the potential to argue in the bankruptcy court that the Medicare or Medicaid provider agreement is a licence as opposed to a contract. Many times in a distressed situation, there is overpayment liability associated with the provider agreement. If the provider agreement can be classified as a licence, it could be sold free and clear of all liabilities within the bankruptcy. However, if the agreement is classified as a contract, then the overpayment liabilities associated with that contract will need to be assumed or paid by the new owner.

Perlman: Healthcare bankruptcies present unique issues, including maintaining quality of patient care, compliance with privacy obligations, extensive regulatory oversight, and the likely appointment of a patient care ombudsman. Providers may seek to reorganise through a Chapter 11 plan of reorganisation, which may allow a company to restructure operations, reduce debt load, reject burdensome contracts, and monetise assets through the sale of some or all of its assets. Many healthcare bankruptcies result in a sale to a financially stronger buyer or a buyer that can benefit from the debtor’s geographic footprint or services provided. Successful restructurings in the healthcare industry typically result from advance planning and cooperation with state and federal regulators. Engaging experienced professionals early will allow for a meaningful evaluation of restructuring alternatives and the ability to engage early with interested parties and garner their support. Advance planning will minimise time in bankruptcy, increasing the likelihood of a successful emergence.

From our experience in community hospitals, there is a definite need for operational improvements.
— Marshall Glade

FW: How do you anticipate the level of distress within the US healthcare sector unfolding in the months ahead? Do companies need to be more proactive in tackling negative trends and pursuing growth?

Glade: There will continue to be significant distress within the US healthcare sector, especially with community hospitals. The payor mix in these settings are skewed significantly toward Medicare, Medicaid or Non-Payor – where reimbursement rates are less than cost – that there is not enough commercial insurance payors to cover the shortfall. The larger healthcare systems will continue to consolidate and make profits. Rural hospitals will need to take a step back and review the healthcare needs of their community. It may have made sense to have a hospital in a certain location 20 or 30 years ago, but times have changed and the community has evolved into needing a different type of healthcare. This might include developing a substance abuse rehab facility, geriatric psychiatric facility or specialised surgery facility, but not a hospital. The surrounding community will speak and it is up to the executives to hear what they are saying and provide them the appropriate mix of service that will allow the facility to be profitable.

Perlman: The level of distress across the US healthcare sector will not dissipate soon. Earlier this year, restructuring experts forecasted that with the continued uncertainty in the political landscape, healthcare would be the third largest industry in terms of total bankruptcy filings – behind the retail and oil and gas industries, respectively. High debt loads continue to grow as healthcare companies take on additional debt to implement necessary technology upgrades, acquire other facilities or effectuate reconfiguration strategies. While hospitals seem positioned to handle their current debt loads, that could change – especially if the ACA is repealed and results in a higher number of uninsured patients, causing providers to face growing financial and operational pressures. Healthcare companies must be proactive in addressing such pressures by evaluating their geographic footprint, outpatient versus inpatient facilities, services provided, and payer mix, while also looking to right-size their balance sheet.

Alfonso: The headwinds are not going away any time soon, but I do not think that means we will see a massive uptick in healthcare filings. The industry in general is well aware of the challenges and uncertainty that lies ahead. The most successful companies will be those whose management teams strive to think ahead about how to manage through negative pressures. A primary goal should be to have cost structures and infrastructures in place that are scalable and flexible enough to adjust to continued pressure on reimbursement and volume, particularly as payment models and demographics shift.


Marshall Glade has served as an adviser to debtors and creditors in both out-of-court restructurings and throughout formal bankruptcy proceedings. He has worked in a number of industries, including real estate, software, banking and most frequently healthcare. Mr Glade has additional experience in pre-acquisition due diligence, forensic accounting investigations, complex valuations and liquidation and trustee advisory work. Mr Glade is a certified public account and began his career as a senior auditor for Grant Thornton. He can be contacted on +1 (404) 835 8844 or by email:

Felicia Gerber Perlman has advised debtors, creditors, lenders, investors, sellers, purchasers and other parties-in-interest in all stages of restructuring transactions from Chapter 11 reorganisations to out-of-court negotiations, workouts and acquisitions. She is a frequent speaker on bankruptcy topics. In addition, she has been recognised in Turnarounds & Workouts as one of the nation’s “Outstanding Young Bankruptcy Lawyers” and repeatedly has been selected for inclusion in Chambers USA: America’s Leading Lawyers for Business and The Best Lawyers in America. She can be contacted on +1 (312) 407 0758 or by email:

Ana M. Alfonso is a partner in the business reorganisation and restructuring department. She is a creditor’s rights advocate with extensive experience representing financial institutions as creditors in bankruptcy proceedings and out-of-court debt restructurings. Known best for her representation of secured lenders, she regularly advises administrative agents, lender groups and bilateral credit providers on complex credits of all sizes. She can be contacted on +1 (212) 728 8244 or by email:

© Financier Worldwide



Marshall Glade

GlassRatner Advisory & Capital Group LLC


Felicia Gerber Perlman

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates


Ana Alfonso

Willkie Farr & Gallagher LLP

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