Five hospital groups filed for bankruptcy protection in 2024, compared with 12 groups in 2023. However, one of those groups, Steward Health Care, involved more than 30 hospitals and marked the largest bankruptcy in the hospital sector in decades, the report noted.
Bankruptcy experts said ongoing economic challenges are still to blame for the high number of filings, particularly low reimbursement rates and increased labor costs that strain operating margins at hospitals and health systems.
The hospital sector is showing “profound instability," said John Rowland, former chair of the corporate restructuring and bankruptcy group at Baker Donelson. He said there will be opportunities for non-traditional lenders with capital to step in and find good deals.
There is a widening performance gap between large provider groups in fast-growing markets and smaller groups in rural markets with a higher concentration of government-insured patients, experts said.
“There’s going to be a bunch of winners and losers just like there always are, and the stronger players will … probably do quite well in the environment that we’re going to see in the next five years or so,” Rowland said.
But size doesn't always translate to financial stability.
In late 2024, there was a noticeable uptick in bankruptcy filings among companies with $100 million to $500 million in liabilities, from no filings in the third quarter to eight in the fourth quarter, according to the Gibbins Advisors report.
Large company stakeholders were more flexible during the COVID-19 pandemic with extensions and waivers on debt repayments, but the industry is moving forward, said Clare Moylan, principal at Gibbins Advisors.
“The COVID excuse is over, and these stakeholders now are looking to find solutions,” Moylan said.
High levels of debt on the balance sheet, especially in private equity-backed deals, are a key factor driving bankruptcy filings. Steward’s bankruptcy filing listed the health system as owing more than $600 million to its top 30 unsecured creditors, for example.
“Many of these companies are highly levered, and they use the financing to pay dividends to their owners,” said Wendy Marcari, an attorney at Epstein Becker Green. “[Debt is] a real problem, and that’s generally why they need resort to bankruptcy or some other restructuring, even if it’s out of court.”
Prospect Medical Holdings is another private equity-backed system that filed for bankruptcy this month.
Private equity companies have been heavily scrutinized by health officials and received ample backlash from the public. Last week, the Biden Health and Human Services Department and federal regulators released a scathing report on the negative impacts of private equity investment in healthcare, including how these deals can lead to closed facilities and lower-quality care. Earlier in January, the Senate Budget Committee released its own report arguing that private equity companies prioritize profits over patients and erode hospitals’ financial health.
Experts say 2025 could be another tough year for healthcare companies.
Moylan said she expects to see continued distress among companies that are in the middle market or below, as they try to compete with larger companies that have economies of scale.
Chad Sukurs, attorney at Hall Render, said interest rates will play a role in the number of bankruptcy filings to come. The Federal Reserve lowered its benchmark rate three times from September to December, with another reduction expected in 2025. Lower rates generally mean better access to capital, more opportunities to refinance and higher valuations on companies looking to sell.
Baker Donelson's Rowland said medical equipment suppliers and other ancillary healthcare businesses could also be at risk for bankruptcy. The spike in demand for medical supplies during the pandemic has faded, and companies are primed to use the resources they have for as long as they can, he said.