Caregivers now in need of care

While all eyes in the bankruptcy world in the first quarter focused on Chrysler LLC and General Motors Corp. and whether the two ailing automakers would avert bankruptcy (they didn't), a disturbing uptick in filings afflicted another sector: healthcare.

As the Obama administration lays plans to tackle healthcare reform in the upcoming months, it is worth noting that half of all hospitals in the U.S. last year lost money. Also worrisome is the fact that there were 30 healthcare-related bankruptcies filed in this year's first quarter, up from 16 and 14 for the same periods in 2008 and 2007, respectively, according to The Deal Pipeline.

The healthcare filings increase helped drive changes in The Deal LLC's first-quarter bankruptcy league tables. Chicago law firm Vedder Price PC, for example, clinched assignments on three of the four largest healthcare bankruptcies in the first quarter, and its 50-case gain vaulted it to 18th place among all law firms from 27th in the fourth quarter of 2008. Vedder Price's Michael Schein (46 active assignments) similarly rose to 19th from 29th by virtue of picking up 17 assignments in the first quarter.

Some bankruptcy professionals expect the healthcare industry's Chapter 11 aches and pains to be passed on to other sectors.

"Fewer people with good insurance means fewer people seeking hospital care, which means fewer drugs and medical devices being sold," said George Pillari (one active assignment), a managing director at Alvarez & Marsal LLC (47 active cases, 3rd among crisis management firms). "So it trickles back all the way through the whole system."

At especially high risk, bankruptcy experts agree, are those medical facilities that rely on philanthropic contributions, which have been falling lately, and hospitals facing rising debt due to issues associated with uninsured patients, whose numbers are leavening in conjunction with unemployment rates.

According to The Deal Pipeline, the four largest healthcare bankruptcies filed so far this year -- Forum Health (with $100 million in assets), Caritas Health Care Inc. ($87.2 million), St. Mary's Hospital in Passaic, N.J., and Wadley Regional Medical Center (both with $50 million in assets) -- were filed in the first quarter. Vedder Price worked on Forum Health, Caritas and Wadley Regional. But it's not likely a one-quarter phenomenon. Except for a spike in February, healthcare bankruptcies have risen month-to-month thus far in 2009.

It can even be argued that not securing healthcare bankruptcy work can hurt a firm's or an individual's rankings in the league tables. Ballard Spahr Andrews & Ingersoll LLP (131 active cases) fell to 15th place in the first quarter among law firms from 9th in last year's fourth quarter, and doesn't have any healthcare bankruptcy assignments in its current caseload. Neither does Morrison & Foerster LLP (68 active cases), which tied for 30th place after having 13 fewer active cases than in the fourth quarter of 2008, when it finished 24th.

Naturally, given bankruptcy's severe upswing, other sectors have had difficulties and commensurate jumps in filings. Crisis manager Begbies Traynor Group plc and investment banking firm Jefferies & Co., for example, benefited from the huge pop in manufacturing-related filings in the first quarter. There were 139 manufacturing-related bankruptcy filings in that period, much more than in the first quarter of 2008 (47) or 2007 (21), according to The Deal Pipeline.

Manchester, England-based Begbies Traynor (25 active cases) gained seven more cases, vaulting it to 10th place among crisis managers from 12th in last year's fourth quarter. Jefferies (23 active cases) didn't gain as many cases (6), and only moved up one spot, but its 3rd-place finish among investment banks is all the more impressive considering it had to rebuild somewhat after the departures of William Derrough and Thane Carlston to Moelis & Co. in August.

Among the investment banks, leader Houlihan, Lokey, Howard & Zukin Inc. had 51 active cases -- a record in that grouping. Senior managing director and CEO Jeff Werbalowsky attributes such a result to the addition of 20-plus professionals within the past six months, some of whom were senior officers who were rehired. He acknowledged that his firm's new hiring round stands in stark contrast to the numerous firms that have been handing out pink slips already this year.

Indeed, firms have been so hard hit in other aspects of their business that an increase in their bankruptcy work still isn't enough to compensate.

Reed Smith LLP (237 active cases, tied for 5th place among law firms) conducted a third round of staff cuts, both in the U.S. and abroad. Mayer Brown LLP (9 active cases in the first quarter) laid off a total of 135 lawyers and administrative staff. Even White & Case LLP (822 active cases), the top law firm in our rankings, reportedly cut staff.

Other firms are using the upcycle as an opportunity to become independent again. National City Corp. (tied for 12th place among investment banks with 5 active cases), acquired SSG Capital Advisors LP in 2006. But in the second quarter, the company will have its own place in the rankings. The firm, now known as SSG Capital Advisors LLC, was spun off again in May with J. Scott Victor (6th place among investment bankers, with 5 active cases) as managing director.

Houlihan Lokey's Werbalowsky said there's plenty of potential for more healthcare bankruptcies, especially since providers are dependent on reimbursement and other rules. "The more regulated a market, the more sensitive it is to material changes," he said.

He said he supports changing the reimbursement system, noting it's "the very backbone" of the healthcare sector.

Jeffrey Levitan, the debtor counsel of Caritas, agreed.

A partner at Proskauer Rose (38 active cases, 48th place among law firms), he said hospitals are in an especially precarious financial situation and some modifications of restrictive regulations are needed. Specifically, he said, "the reimbursement system needs revamping -- it's not currently adequate to cover hospital operations without relying on subsidies. Too many institutions are living hand-to-mouth, relying on state assistance to survive."

And when these companies enter bankruptcy, the professionals hired to try to get them out become well-acquainted with these pressures themselves.

Bruce Buchanan, the chief restructuring officer of bankrupt Integra Hospital Plano LLC, said the challenge is building long-term sustainability solutions for individual institutions that are "important assets in communities they serve."

Buchanan, a managing director at crisis manager Healthcare Management Partners LLC (Integra is the firm's one active case), said there aren't too many options for healthcare providers.

"No funds are available locally, and no buyers either," he said. "The private groups are struggling themselves."

The healthcare package within the federal government's stimulus package is also lacking, Buchanan said. "It focuses on expanding access and availability," he said, when it really should be used to lure physicians to participate by paying them more.

Buchanan agreed the reimbursement system needs re-tooling. It costs physicians an estimated $80,000 a year just to comply with billing regulations and get paid property. That's a "huge burden" that stands in the way of hospital quality and functionality.

Alvarez & Marsal's Pillari said reform is a luxury right now. "Nobody is thinking about improved performance in the next quarter," he said. "We're all just looking to hang on and stabilize."

It sounds like a mantra nearly everyone in every industry can relate to today.