Private equity bankruptcies in health care increased 112% in 2023

Private equity firms owned more than 20% of the health-care companies that went bankrupt last year. The nonprofit Private Equity Stakeholder Project, which investigates multiple industries, said it spotted at least 17 such bankruptcies in 2023, compared with eight in 2019 and even fewer during the previous three years, marking a 112.5% increase over the last five years.

Private equity-backed companies carry among the highest debt loads in the health-care industry, leaving them particularly vulnerable to market factors, Eileen O’Grady, the project’s health-care director told Healthcare Dive. “The price of debt is the number one factor in this trend,” she said.

The report cited several repeat offenders, including KKR, whose physician staffing agency Envision Healthcare and oncology provider GenesisCare filed for bankruptcy last year, and H.I.G. Capital, which backed weight management brand Jenny Craig. Both firms also have other companies skirting the line with high credit risks, it said.

The report also mentioned U.S. Renal Care, Elara Caring and LifeScan, which it said “have managed to kick the bankruptcy can down the road” by relying on distressed exchanges in which companies deal out assets to creditors at reduced valuation to stave off bankruptcy.

The report acknowledged five-year highs in overall and high-impact (liabilities of more than $100 million) health-care bankruptcies last year. Nevertheless, the group said private equity’s profit strategies and broader macroeconomic conditions have combined to lead more of their portfolio companies to insolvency. Increased levels of debt, often taken on to help fund dividends for investors, leave private equity-owned companies more vulnerable to changing market conditions, including high-interest rates and rising labor costs, the report said. Implementation of the No Surprises Act also fueled high-profile bankruptcies such as that of Envision Healthcare.

The report cited Moody’s Investors Service data suggesting that more private equity-owned bankruptcies may be on the horizon. Among the 45 health-care companies that the ratings agency considered to have “obligations considered speculative and subject to high credit risk,” 42 were owned by private equity firms.

Another wave of private equity-driven health care bankruptcies is expected in 2024, as almost all of the most distressed health care companies are owned by private equity firms, according to the Private Equity Stakeholder Project.

State and federal lawmakers recently have begun to probe the role of private equity in health care to understand how the firms affect companies and patients. Senators have launched two separate inquiries into private equity since December, with one focused on firms’ involvement in hospital operations and another centering on private equity-funded emergency departments. The Federal Trade Commission, Justice Department and Health and Human Services Department launched their own probe last month, assessing health-care private equity deals.

Related: FTC, DOJ’s new ‘anti-merger’ stance: How the feds will scrutinize health care in 2024

“There are situations where private equity firms are buying distressed companies, and then those companies remain distressed,” O’Grady said. “Whether the private equity firm made it worse or was just prolonging the inevitable is probably situational. But at the end of the day, are they making things any better? In many cases, they’re not.”