Over 20% Of Healthcare Bankruptcies Last Year Were Linked To Private Equity: Report

Dive Brief:

• Over 20% of healthcare companies that filed for bankruptcy in 2023 were owned by private equity firms, according to a new report released Wednesday from the Private Equity Stakeholder Project.
• Another wave of private equity-backed bankruptcies is likely this year, as almost all U.S. healthcare companies considered at high risk of default are backed by private equity, the nonprofit said.
• Private equity firms’ “aggressive debt-funded growth strategies” are to blame for the bankruptcies, said Eileen O’Grady, healthcare director at the PESP. 

Dive Insight:

Healthcare bankruptcies reached a five-year peak in 2023, according to restructuring firm Gibbins Advisors.

Bankruptcies can cause care disruptions, facility closures and layoffs, according to the PESP. They can also stress broader healthcare infrastructure if patients have to travel to neighboring facilities to receive care during service disruptions.

Although other research has pointed toward rising labor costs, pressured relations between payers and providers and high interest rates as factors contributing to bankruptcies, PESP argues debt tactics instigated by private equity firms are to blame for the current surge of filings.

Private equity-backed companies carry among the highest debt loads across the healthcare industry, leaving them particularly vulnerable to market factors, O’Grady told Healthcare Dive in an interview. 

“The price of debt is the number one factor in this trend,” she said.

Private equity firms often use debt to finance initial investments and pay investors, in transactions called dividend recapitalizations, according to the report. For example, in 2021, private equity firm InTandem Capital Partners added new debt to now-bankrupt primary care provider Cano Health’s balance sheet in part to finance a $100 million dividend to shareholders.

The tactics can saddle companies with debt, according to the report. While publicly traded healthcare companies average a debt to earnings before interest, taxes, depreciation and amortization ratio of around 3x earnings, companies acquired by private equity firms averaged a debt-to-EBITDA ratio of 5.9x in 2023, according to a report from Bain & Company.

As of November, all but three of the 45 “most distressed” healthcare companies were owned by private equity firms, according to ratings agency Moody’s Ratings.

Some private equity firms are “repeat offenders” who saddle companies with unmanageable debt, according to the report.

KKR owned two healthcare companies that filed for bankruptcy last year: staffing firm Envision Healthcare and oncology provider GenesisCare. The private equity firm currently owns three additional companies — Covenant Physician Partners, Global Medical Response and One Call Corporation — that are at heightened risk for default, according to the report.

H.I.G. Capital is another repeat offender. The private equity firm owned weight management company Jenny Craig and mental health company Community Intervention Services before they filed for bankruptcy in 2023 and 2021, respectively.  

Some private equity firms have argued that the association between private investment and high debt-loaded companies is there, but it isn’t directional. They argue private equity firms acquire assets that are already distressed, or, at the very least, struggling financially, and so they cannot be blamed for problems down the line.

For example, Cerberus Capital Management, which formerly owned Dallas-based Steward Health Care, has said its ownership allowed a struggling health system to remain open.

“There are situations where private equity firms are buying distressed companies, and then those companies remain distressed,” O’Grady said. “Whether the private equity firm made it worse or was just prolonging the inevitable is probably situational. But at the end of the day, are they making things any better? In many cases, they’re not.”

State and federal lawmakers have recently begun to probe the role of private equity in healthcare to understand how the firms impact companies and patients.

Senators have launched two separate inquiries into private equity since December, with one focused on firms’ involvement in hospital operations and another centering on private equity-funded emergency departments. The Federal Trade Commission, Justice Department and the HHS launched their own probe last month assessing healthcare private equity deals.