The increase in bankruptcy filings that restructuring professionals have been expecting is now arriving. With rising inflation, increased interest rates, tightening credit markets, labor shortages and supply chain disruptions, we are starting to see a dramatic increase in filings. Last week the American Bankruptcy Institute noted that commercial Chapter 11 filings increased 105% in May 2023 as compared to May 2022 and across the board filings are on the rise as well.
The healthcare industry is not immune from the pressures impacting the economy. Indeed in many ways, healthcare has been one of the most impacted industries since the beginning of the COVID-19 pandemic. According to Debtwire, through the first five months of 2023, we have already seen approximately the same number of healthcare Chapter 11 filings as we did in all of 2022. Despite the increasing number of pre-pack and pre-arranged Chapter 11 cases, since 2016 half of all healthcare cases have been “free fall” cases, resulting in longer and sometimes more contested proceedings.
Last month, healthcare company and national hospital-based physician group, Envision Healthcare Corporation and 216 affiliates (collectively, “Envision”) filed one of the largest healthcare Chapter 11 bankruptcy cases in recent history.
Envision employs or partners with more than 21,000 clinicians providing care to patients with nearly 30 million visits each year. Envision accounts for approximately 10% of all emergency department visits each year and is one of the largest providers of anesthesia in the US. According to court filings, Envision was hit with a perfect storm of pressures forcing it to restructure its approximately $9.5 billion in debt. Factors cited by Envision included:
- The COVID-19 pandemic resulted in obvious stresses on Envision’s clinical enterprise. The emergency medicine clinicians and anesthesiologists experienced surges—treating 1 in 10 of all US COVID-19 patients at the height of the pandemic. At the same time, however, non-emergency visits, and the associated revenue, decreased by 60-70%. In all, Envision experienced negative impacts on revenue in 2020 and 2021 to the tune of $415 million and $380 million, respectively.
- The passage and implementation of the No Surprises Act (“NSA”) imposed further stress on Envision. The NSA established federal patient protections against surprise medical bills that arise when insured patients inadvertently receive care from out-of-network hospitals or providers they did not select. While Envision apparently supported the NSA patient protections, it claims that the regulatory implementation of the NSA was flawed.
- Labor costs due to the lack of available medical professionals in the wake of COVID-19 forced wages up while inflationary pressures increased the cost of equipment and other necessary supplies. Wage pressure alone has resulted in over $300 million in additional wages as compared to 2019.
- Finally, Envision blamed the “uniquely aggressive” behavior of its largest payor for reducing total reimbursement by nearly 60% over the past five years, resulting in a decline of more than $400 million in revenue.
Unlike many recent healthcare Chapter 11 cases, Envision is not a “free fall” but rather, entered bankruptcy with negotiated restructuring support agreements (“RSAs”) in each silo of its capital structure. Envision stated in its bankruptcy filings that the RSAs are supported by the company’s consenting sponsors (primarily KKR entities) and more than 60% of the $7.7 billion in funded debt obligations. The goal of the RSAs is to substantially reduce leverage, which will allow Envision the flexibility to respond to and navigate the current business environment.
In addition to fixing the balance sheet, one of the added benefits of the Envision Chapter 11 proceeding is that Envision was able to stay its litigation with UnitedHealthcare (“UHC”). In that litigation, which was filed by UHC in September 2022, UHC is seeking to recover tens of millions of dollars in damages for emergency room claims that UHC alleged were intentionally upcoded. See United HealthCare Insurance Co. v. Envision Healthcare Holdings, Inc., Case No. 3:22-cv-00697 (M.D. Tenn.). On May 30, 2023, Envision filed a Notice of Suggestion of Bankruptcy and Automatic Stay of Proceedings. As a result, on June 1, 2023, Envision’s dispute with UHC was stayed pending further order of the Court. The litigation is sure to play out in the context of the Envision’s bankruptcy proceeding.
Envision’s troubles, which resulted in its bankruptcy, are endemic within the healthcare community. Corporate combinations result in highly levered companies, which are now unable to navigate through the business and economic changes in the healthcare space since 2019. Though interest rates did not increase this week, the outlook in the healthcare space remains concerning. The regulatory environment will likely continue to spin-off high stakes litigation, which, when coupled with the economic environment, will make bankruptcy an attractive option. To the extent that private equity sponsors remain at the helm of these companies, prepack bankruptcy filings will also become more common in this space.