Healthcare saw Q2 reprieve from record bankruptcies
The healthcare industry experienced fewer commercial bankruptcies in the second quarter of 2018 relative to the first quarter, after the sector suffered record or near-record highs in each of the past eight quarters, according to a new report.
The law firm Polsinelli tracks Chapter 11 bankruptcy filings among companies with assets of at least $1 million and releases a quarterly stress index. In the second quarter, the overall index was 49.26, down 5 points since the first quarter, despite having increased in three of the past four quarters.
Healthcare's distress index was a whopping 340 in the second quarter. While far exceeding the other indices, that's still down 115 points from the first quarter's record high, according to Polsinelli's report.
Healthcare bankruptcies represented 7.8% of all bankruptcies Polsinelli tracked in the second quarter, down from 9.5% in the first quarter.
"The healthcare index has just been bananas lately with the number of filings," said Jeremy Johnson, a bankruptcy and restructuring attorney with Polsinelli and an author of the report.
One year ago, by contrast, healthcare bankruptcies comprised 5% of all bankruptcies, and just 3% two years ago, Johnson said. He said he doesn't predict the recent dip in healthcare filings will last.
"I think it's going to bounce back up due to some new filings," he said.
Polsinelli's index, which excludes individual and involuntary cases, uses the fourth quarter of 2010 as a benchmark to compare bankruptcy filings because it's a few years removed from the Great Recession. Since that quarter, healthcare's distress index has increased 240%, while overall distress is down 50% and real estate sector distress is down 68%.
Major contributors to healthcare sector bankruptcy filings include tort liability, reimbursement problems, government audits surrounding fraud issues and over- and under-expansion, Johnson said. When surveying hospitals on the subject, Johnson said his team was surprised that few attributed their problems to the Affordable Care Act's technology requirements.
Healthcare is experiencing pressure from multiple fronts that don't affect other industries to the same degree, Johnson said.
"It doesn't really match up with what you see in real estate or generally across the board," he said.
Fitch Ratings expects stable cash flows and robust capital markets will keep the U.S. healthcare sector's default rate well below the overall market rate, according to a July report. The sector that includes healthcare and pharmaceuticals saw an average high-yield default rate of 1% between 2002 and 2017, materially lower than the 4.1% rate for the market overall during that period.
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