Health Care Bankruptcies Hit Record High, But Home Health Care’s Financial Future Remains Murky

An increase in bankruptcy filings in the second quarter of 2020 paints a bleak picture for the health care world, both on near- and long-term bases. But the impact of that financial distress on home health providers remains difficult to gauge.

In part, it’s challenging to gauge how home health providers will respond in a distressed sector because there’s still an influx of government funding and other forms of financial relief. Additionally, near- and short-term projections are made even murkier by fluctuating unemployment levels, which are rising in some parts of the U.S. and steadying in others.

The health care sector’s current financial health was detailed Wednesday in the newest Polsinelli-TrBK Distress Indices Report.

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“We all sort of sensed that the health care sector was going to start popping significantly as a result of COVID-19,” Jeremy Johnson, a shareholder at the Kansas City, Missouri-based law firm Polsinelli, told Home Health Care News. “And none of that was really captured in Quarter 1, but it obviously hit full force in Quarter 2 with the number of filings.”

Johnson was the lead writer on the report. As part of his role at polsinelli, he also provides clients with legal guidance regarding financial restructuring as well as transactional and litigation matters.

Polsinelli and Johnson track Chapter 11 health care filings — or “reorganization bankruptcies” — in a quarterly distress index focused on organizations with assets of more than $1 million. Generally, Chapter 11 filings allow companies to restructure debt and assets.

There were more than 200 such filings in the second quarter alone, the highest ever recorded in a single quarter.

During the second quarter, the distress index value for health care was at 510, an increase of more than 276 points from last quarter. The higher an index value, the more financial stress a sector is facing.

“We believe that the COVID-19 filings in health care haven’t even really gotten started,” Johnson said.

Government funding and a recent surge in patients have masked some of the home health industry’s financial troubles tied to the COVID-19 virus. Those two points have also masked some of the turbulence tied to the Patient-Driven Groupings Model (PDGM).

“When COVID-19 hit in the health care space, it affected different segments of the business differently. But the long-term care businesses and hospitals, they were the beneficiaries of significant federal funds,” Johnson said. “But some of those tabs are going to start to come due. And that’s going to be a big problem for a lot of these health care entities going forward.”

There haven’t been many chapter 11 filings in the Distress Indices for home health agencies, unless they’ve been a part of a larger bankruptcy, such as a home health segment within a hospital. That’s probably because there is traditionally very little to reorganize in a home health agency, Johnson said.

There aren’t many hard assets or any good reason to use bankruptcy if a home health agency runs into financial woes, he noted.

That doesn’t mean agencies won’t feel direct and indirect impacts from widespread Chapter 11 filings, however. It could mean that home health agencies start acquiring the assets of other health care institutions that are failing.

But the added costs and added liability that home-based and long-term care providers will face moving forward could present a slew of challenges.

“In terms of liability, that is an especially difficult moving target,” Johnson said. “But there is obviously some support and momentum behind the idea of some sort of liability shield for certain kinds of providers.”

As for added costs, that includes PPE and resources for infection control, which providers continue to pay a great deal for. PPE historically has not been a substantial business cost for in-home care providers.

There’s also the burden of possibly paying back loans tied to the Paycheck Protection Program (PPP) or other financial lifelines, such as the Provider Relief Fund. Some providers, as Johnson pointed out, are still struggling with whether these are loans or grants.

When it comes to Chapter 11 filings in the health care, Delaware saw the most fillings overall, likely because a significant number of businesses go through the incorporation process in the state due to its favorable protections. Apart from Delaware, the Southwest region saw the most distress in the health care sector.

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