COVID-19 will trigger a wave of healthcare bankruptcies in 2020, but the pandemic had the opposite effect in the first quarter.

That's because the economic turmoil in March likely threw a wrench in the exit strategies of companies that had previously planned to file last month. And since most of the damage hit in mid-March when many stay-at-home orders took effect, March 31 was too soon for most other filings.

"If there was no COVID, I think the number of bankruptcies would be a little higher," said Jeremy Johnson, a shareholder with the law firm Polsinelli who handles bankruptcies, said of the first quarter filings. "But then we know it's going to go up."

Polsinelli's first quarter 2020 distress report found the healthcare distress index grew by eight points in the recently ended quarter, which is 133% above the benchmark created in the fourth quarter of 2010. The report's distress index measures bankruptcy filings on a trailing, four-quarter basis, which the firm says smooths volatility and provides a better picture of long-term trends.

Polsinelli measured healthcare's distress index at 233.3 in the first quarter, significantly higher than the overall Chapter 11 distress index of 54.5, and the real estate distress index of 30.8.

The report includes all patient-facing healthcare, including hospitals, ambulatory surgery centers, physician clinics and behavioral health clinics. Lately, Johnson said it's been a lot of senior living facilities and hospitals. In the first quarter, that included Thomas Health in West Virginia and Randolph Health in North Carolina.

Although the bankruptcies that will inevitably be prompted by COVID-19 didn't hit in the first quarter, Johnson said they'll start to trickle in in the second, third and fourth quarters.

One example is for-profit Quorum Health Corp., whose hospitals are located in rural and mid-sized markets. The Brentwood, Tenn.-based company filed for Chapter 11 bankruptcy in early April, the second quarter. Quorum has lost money since its 2016 spinoff from Community Health Systems, and cited COVID-19 as one factor that prompted its filing.

Hospitals have been forced to halt profitable elective procedures during the pandemic, prompting steep revenue declines. That coupled with the expense of treating complex COVID-19 patients for extended periods of time has placed many in dire financial positions.

Most health systems have been scrambling to boost liquidity by drawing on credit lines, issuing bonds and taking out bank loans. But that won't be enough for some, especially smaller hospitals or health systems.

There's a legal question as to whether or not companies can file for bankruptcy while simultaneously collecting federal stimulus funding under the Coronavirus Aid, Relief, and Economic Security Act.

Cynthia Romano, a global director in CohnReznick's restructuring and dispute resolution practice, said companies are not allowed to collect stimulus relief while they're in bankruptcy, which will postpone healthcare filings to the third and fourth quarters "when stimulus funds are no longer in play."

Struggling healthcare providers could argue that's discrimination against companies that need stimulus funding the most, Johnson said. He predicts a forthcoming wave of litigation on that question. That may be a losing battle for providers, though, as the stimulus funding is likely to run out before their court victories, he said.

Lots of bankruptcies will correspond with lenders or private equity firms taking stock of their portfolios and determining where demand has rebounded and where it hasn't, Romano said.

"They will be making choices about who lives and who dies from a corporate perspective," she said.

In the first quarter, 71% of healthcare's Chapter 11 filings were among the smallest companies measured: those with $1 million to $10 million in assets, Polsinelli found. The report excludes companies with fewer than $1 million in assets. Johnson said it's typical for most bankruptcy filings to be smaller providers, especially rural hospitals.

The highest concentration of filings were in the Southeast, South and Pacific Northwest.

Healthcare bankruptcies had already been on the rise before the pandemic hit, Romano said. Healthcare comprised 2.9% of all corporate bankruptcies at the end of 2015 and 9.9% by the end of 2018, she said.

Now, in the age of COVID-19, even previously strong providers are on thin ice.

"I don't care how healthy you were," Romano said. "You think about the teetering ones, that puts them over the edge. If you think about the really healthy ones, that puts them in significant distress."

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COVID-19 pandemic likely put some bankruptcies on hold - ModernHealthcare.com