Senior care providers accounted for more than a quarter of major healthcare bankruptcies in the last several years, and with mounting pressures caused by excess staffing agency use and other financial challenges, more nursing homes may be joining the growing crowd.

That’s the take from a lawyer and financial advisor with extensive healthcare sale and closure experience, and who were instrumental in finding a buyer in the case of Iowa’s bankrupt QHC chain last year.

“During COVID, lenders were more willing to stay on and negotiate and work with the borrowers. They were more willing to enter into refinance options or forbearance agreements,” said Krystal Mikkilineni (pictured), shareholder at Dentons Davis Brown in Des Moines, IA. “Now we’re seeing a switch. The lenders are basically fed up and are not willing to continue cooperating.”

That has led to more receiverships and foreclosure actions, and it may precipitate more nursing home bankruptcies, Mikkilineni explained. She and Ronald Winters, of Gibbins Advisors LLC in Nashville on “Healthcare transactions in a distressed environment” at the American Health Law Association’s Long Term and Post-Acute Care Law and Compliance conference earlier this month.

Healthcare bankruptcies jumped 84% in 2022, returning to pre-COVID levels, Winters noted. From 2019 to 2022, senior care made up 26.3% of those filings, more than any other segment. That was among about 50 fillings annually involving businesses with $10 million or more in liabilities.

Winters outlined eight key factors forcing more nursing home owners, even relatively small ones, to consider bankruptcy as an exit strategy. But he said staffing costs, and especially agency dependency, has had an outsized influence. Providers struggling with capital who use agency to push payments down the line may be dooming themselves.

Ronald M. Winters, principal,
Gibbins Advisors

“If you’re worried about making payroll every week, if you get an agency and you maybe pay them once a month, you’ve bought yourself a little bit of a working capital break,” Winters said. “Frequently, what nursing homes would do at the end of the month, they’d stretch the agency further, and when they couldn’t stretch the agency further, they dropped the agency and got another agency. And before you knew it, they had a lot of trade obligations with vendors.

“That mounting agency obligation, I think, made the out-of-court receivership solution more difficult because it was just too much for the secured lender to take on himself. It forced a lot of the bankruptcies we’re seeing now.”

Potentially costly decisions

But bankruptcy is not an easy or inexpensive solution, cautioned Mikkilineni.

Providers who consider the option must know what type of plan they want to pursue and how they hope to emerge. Various bankruptcy chapters allow for reorganization, a controlled sell-off, or a hybrid of both.

Vendor debts, provider agreements and access to capital while trying to negotiate a sale can all influence whether a costly bankruptcy procedure is an acceptable option.

“It is not a cheap option. It is a good option sometimes, but you have to consider the expense associated with it,” Mikkilineni said. “If there are a lot of vendors you owe, it’s going to be hard to turn to them and do an out-of-court workout. … Bankruptcy is probably a better option for you.”

Even so, the goal must be to protect the health and welfare of residents; finding a buyer and ensuring they can get through change of ownership requirements or buy out a provider agreement can be a timely process. 

Mikkilineni has worked through some cases, including the 10-facility QHC deal in Iowa along with Winters, that required the initial owner to hire the potential buyer as a manager as soon as the bankruptcy judge gives the OK. It’s a risky proposition for a buyer, who might need to be talked into taking the risk.

For bankrupt clients, though, there may be no other option if their access to even bridge financing, known as a debtor-in-possession loan, is cut off and the ability to hire staff and supply services to residents is at risk. It’s typically only those who have some liquidity left that can keep operating during a restructuring, Mikkilineni said.

Some factors that might attract partners in bankruptcy could be the ability to improve census or boost the Medicare-Medicaid payer mix, or offering a facility that it is not in an overbedded market.

“You have to figure out your angle before you file,” Mikkilineni said.

What to avoid

Winters underscored that it’s “generally advisable” for providers to avoid a bankruptcy even if they are planning to leave the sector.

“It will inevitably take longer and you’ll run into more complexities than you think going in,” he added. “Even though nursing homes are at the end of the day relatively small enterprises, individually, even decent-sized nursing homes, the mechanics of selling them and all the negotiations, is complicated.”

Still, Winters and Mikkilineni acknowledged that stiff headwinds continue to buffet owners and operators. They predicted there will be continued closures and reductions in the number of facilities. 

Mikkilineni suggested working closely with lenders, if possible, to consider other strategies first.

“There should be discussions about alternative options as well,” she added.