Chapter 11 for physician practices: 'Not just for major players'

Editor's note: This is an excerpt from a Part B News story about a recent Gibbins Advisors analysis showing physician practice bankruptcies up by 60% in the past year.

 

Interestingly, the Gibbins analysis finds that “a relatively high percentage (30%) of very large health care bankruptcies (liabilities >$500M) were [private equity]-backed.” This suggests that the large scale of PE acquisitions, and their tendency to “roll up” smaller entities into larger ones, makes their managers likely to opt for bankruptcy as a tool when finances get difficult.

 

Chapter 11 protection isn’t only for major players, though. Paul W. Carey, co-managing partner of Mirick O’Connell in Worcester, Mass., who has extensive experience in creditors’ rights, bankruptcy and reorganization, says one possible reason for the spike is that the cited financial problems “can be streamlined in bankruptcy. Once you’re in bankruptcy, you’ve got one forum to negotiate with your suppliers, to do staff right-sizing, to get out from under expensive leases of space and equipment. And you have a forum for insurance provider negotiations if you’re not getting the rate adjustments that you’re hoping.”

 

Carey also notes a fresh opportunity for many practices to avail bankruptcy protection was opened when Congress passed the Small Business Reorganization Act of 2019, which created a new “subchapter V” for chapter 11.

 

As described by the U.S. Department of Justice Trustee Program, subchapter V “imposes shorter deadlines for filing reorganization plans, allows for greater flexibility in negotiating restructuring plans with creditors, and does not require the payment of United States Trustee quarterly fees.”

 

The subchapter, when first released, was meant for small businesses with a debt limit of $2,725,625. But, Carey explains, “when COVID happened, that limit rose to $7.5 million. So a lot of your doctor practices and other small- and mid-sized companies actually became eligible for this streamlined form of Chapter 11 bankruptcy. That increase was sunset on June 21, and the limit is back down to $3,024,725 -- so I think you’ll see a negative impact from that on smaller organizations being able to reorganize effectively.”

 

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