Healthcare companies are at higher risk of defaulting on their loans than many other industries, according to a new report.
The healthcare industry had the highest likelihood to default over the next year at a 4.4% median, first-quarter S&P Global Market Intelligence data comparing U.S. sectors show. That probability was up from 3.3% as of the end of last year, according to S&P’s analysis, which is based on the volatility of share prices for public companies and country- and industry-related risks.
People always need healthcare, which is why many have said the industry doesn’t follow the swings of the broader economy. But staffing shortages, canceled non-urgent procedures and pandemic fears have stressed the healthcare sector, according to the report. Healthcare typically has a default rate of closer to 1%, significantly lower than other sectors, past reports show.
“There was a perception before the pandemic that healthcare was ‘recession-proof.’ But this is a fundamentally different environment,” said Matt Wolf, director and senior healthcare analyst with RSM. “Providers have had to shut down non-emergent procedures, either due to lockdowns or not having the staff to perform them. They’ve paid the staff they do have more while reimbursement levels are not going up. They are not going to hire their way out of this.”
Healthcare sectors were the top three sectors when it comes to the potential to default on debt repayment, with healthcare facilities at 9.15%, healthcare technology at 7.37% and healthcare services at 6.76%, according to S&P data.
But the healthcare facility sample size was only 22, and likely consisted of relatively weaker for-profit performers, said Kevin Holloran, senior director at Fitch Ratings. The report wasn’t indicative of the broader U.S. public finance healthcare sector, which has many investment-grade not-for-profit hospitals with a median rating A/A+, he said.
If healthcare companies are running up against their debt covenants and short on cash, lenders will often work with the organization or investors to restructure the terms of the loan. Short of a Chapter 11 restructuring or liquidation, lenders may opt to shake up the company’s board, take equity of the company or ask for in-kind payment. Financial instability could also attract potential buyers looking to acquire an organization at a discount.
The COVID-19 pandemic and economic downturn were expected to spur a wave of bankruptcies across many sectors. But that never really materialized because of state and federal government financial aid, Wolf said.
“We’ve actually seen a huge increase in new business formations as people have been let go and are trying something new,” he said.
Higher staffing costs coupled with reimbursement cuts pose long-term threats to the healthcare industry, experts said. Sequestration restarted this month, cutting Medicare reimbursement rates by 2%. A separate round of 4% Medicare cuts totaling about $36 billion is set to kick in next year.
Meanwhile, many Americans skipped care last year due to lockdowns, cost and other obstacles. Those that reenter the system will likely be sicker and cost more to treat, Wolf said.
“These are significant headwinds for the healthcare sector,” he said.