For the past two years, the volume of healthcare deals has soared to new heights. Much of the growth has been powered by financial buyers, private equity firms in particular, piling into the healthcare services sectors. In 2018, a new record for annual deal volume was hit, now standing at 1,917. The services sectors accounted for 65% (1,242 deals), slightly higher than the typical 60% to 62%. Last year’s total deal tally now stands at 1,824 transactions, the second highest total ever recorded, and 70% of that comes from healthcare services deals.

Why, then, have Chapter 11 bankruptcy filings among the services sectors spiked along with that activity? Since the second quarter of 2017, the Polsinelli Health Care Services Distress Index has shown bankruptcies in this area have skyrocketed. Healthcare services companies made up 5.7% of all Chapter 11 filings in Q2:17. They hit a new record in the fourth quarter of 2018, accounting for 12.7%. All through 2019, healthcare services made up 9.0% or more the quarterly totals. In the fourth quarter of 2019, filings had settled to a more normal 5.0%.

The Polsinelli-TrBK Distress Indices track the increase or decrease in Chapter 11 filings by businesses with more than $1 million in assets since the fourth quarter of 2010. They cover public and private companies, and report on a rolling four-quarter basis to minimize quarter-to-quarter spikes.

“In terms of what sectors are experiencing distress, in the last one to two years, it’s primarily senior living (CCRCs and skilled nursing facilities), behavioral health and hospitals (primarily rural, but also some non-rural),” said Jeremy Johnson, a bankruptcy and restructuring attorney at Polsinelli and editor of the Distress Indices reports.

There is probably even more distress being felt in these sectors than what appears on the surface, he added, because major cases such as the HCR ManorCare filing in March 2018, with $7.1 billion in debt, are counted as a single case. Some 300 nursing homes were part of those procedures, Johnson said.

All of the bankruptcy filings among healthcare services in Q4:19 were for long-term care companies and hospitals.

While Johnson and his team track the number of filings, they don’t make an official report on the causes. It won’t startle our sophisticated readers to hear that the massive influx of private equity firms into the behavioral health care space, for instance, may have over-leveraged some balance sheets.

In the hospital space, the financial struggles of smaller community-based and rural hospitals are well known. A few private companies, such as Americore and EmpowerHMS, acquired distressed rural hospitals in Kansas, Kentucky, Ohio and Pennsylvania, among others, with promises to local communities that streamlining operations and finding cost efficiencies were the paths to success. Both operators have abandoned their facilities, leaving unpaid employees and creditors and shuttered hospitals behind.

There’s no doubt that some bankruptcies create opportunities for the right investors, Johnson said. But they do have to be the right investors. Verity Health System of California filed for bankruptcy late in 2018. Privately held KPC Healthcare bid $610 million to acquire six facilities, but didn’t follow through on the sale. One of those hospitals, St. Vincent Medical Center (320 beds) in Los Angeles, closed in December 2019.

There may be distress among heatlhcare services companies, but that isn’t showing up on the healthcare real estate side. Christopher Honn, managing director of the Healthcare Real Estate Group at Regions Bank, says deal flow in the seniors housing real estate space has been “incredibly robust. The fourth quarter [of 2019] was our best yet in seniors housing and we’re hoping to top that in Q1 2020.”

Not all areas are doing well, he admits. Skilled nursing facilities have faced regulatory and reimbursement headwinds, in addition to tight labor markets. Independent living, assisted living and memory care properties are pulling the weight in this sector, although Honn says the SNF market has shown more activity recently.

Still, the Regions team isn’t relaxing. “We’re always looking for signs of distress, Honn said. “As fast as a property can underperform, it takes much longer to come back.” In 2020, the team is focused on seniors housing, monitoring quarterly projections against what actually happened. If a loan doesn’t meet projections made when it closed, “We dig into those situations in real time.” But that’s not happening often.