Deals involving financially distressed entities are increasing in the health-care industry, and will continue making up a large part of the market, attorneys who counsel clients in the area told me.
Jeremy Johnson, a Polsinelli lawyer in New York, pointed to an index compiled by his firm that tracks bankruptcies in the space—the number has grown 20 percent since 2010. Johnson doesn’t see any probability of the trend reversing, meaning there are lots of good deals to be had in the industry.
But Spalding & King Atlanta partner Tom Hawk advises proceeding carefully. These deals come with their own challenges for both sellers and buyers.
The decision to sell is often a “numbers issue,” Hawk said. A hospital simply doesn’t have the funds needed to compete or bring its systems into compliance with government regulations. Sellers are looking for buyers who can provide the funds and rescue the provider, possibly saving the only hospital in a rural area.
But the aging of the American population, with its increasing dependence on Medicare to pay for health care, makes it very hard to operate in these locations, Hawk said.
And even long prior to closing the deal, conducting due diligence can get complicated for the buyer. Many people with key knowledge may have jumped ship by this point, and compliance programs could have received short shrift in light of the more pressing problem of keeping the hospital afloat.
Putting the distressed hospital through bankruptcy has many benefits—mostly because it results in the discharge of many debts. But it also has some disadvantages, especially if the entity’s financial problems weren’t well known before the bankruptcy petition was filed publicly.
Read my story about the reasons hospitals become financially distressed and how the deal process works when these entities are involved here.
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