What you need to know about insolvency and the healthcare sector

Insolvency leads to insolvency proceedings under the Insolvency and Bankruptcy, Code, 2016, and legal action is taken against the insolvent person or entity. For the insolvency and the healthcare sectorcauses many issues other than financial and legal challenges. Knowing about insolvency allows stakeholders to identify early warning signs, implement restructuring strategies, and protect patient access to healthcare services when a facility is facing financial difficulties.

Overview of insolvency and the healthcare sector

insolvency and the healthcare sector means that the healthcare provider, a hospital or clinic, fails to meet their financial obligations because of excessive debt. This is due to several factors, high operational costs, non-payment by patients, investments in technology, etc. Therefore, similar to other companies facing insolvency proceedings, healthcare providers also face financial and legal issues but need to be handled with more care due to the services it provides.

i) Financial Pressures in Healthcare:

The escalating labour, technology, and compliance expenses impact profitability, pushing companies in the healthcare sector to insolvency. The healthcare industry was also significantly impacted by the pandemic in 2020. Due to increased patient demands, supply chain disruptions, and staffing shortages have increased financial pressures on healthcare providers. Insolvent pharmaceutical companies and companies providing medical equipment face persistent non-performing assets and liquidity crunch have become a pressing issue. 

Read more : Offences and Penalties under IBC, 2016

ii) Insolvency Trends in Healthcare:

Although insolvency and the healthcare sector filings slowed down in 2023, financial challenges persist. As a result of economic downturns and their impact on market structure, smaller hospitals, and clinics are more vulnerable due to lower financial buffers. Being in an industry that is related to the general public, it faces unique challenges like maintaining patient care during insolvency proceedings while compiling with sectoral regulations. 

Insolvency as a Catalyst for Innovation

i) Restructuring Operations:

The insolvency framework in India allows organisations to identify inefficiency and adopt innovative practices that help to reduce their costs and avoid insolvency. Companies can also utilise insolvency laws and related rules and regulations to renegotiate contracts, optimize staffing, and improve productivity.

ii) Technology Adoption:

Many distressed insolvency and the healthcare sector providers leverage insolvency to restructure and reinvest in emerging technologies such as telemedicine and diagnostics by artificial technology. For instance, following restructuring, ABC Hospital significantly improved its operational efficiency by implementing various health technologies, allowing for streamlined processes, reduced costs, and enhanced patient care through features like electronic medical records, and data analytics, leading to a more financially stable organisation.

iii) Strategic Collaborations:

The Insolvency and Bankruptcy Code, 2016 (IBC) aims at reviving, restructuring, or rehabilitating. Thereby, insolvency proceedings often result in mergers with large healthcare entities, enabling resource sharing and economies of scale. Public-private partnerships (PPP) are a way for healthcare providers to share risks secure funding, and improve access in the healthcare sector by leveraging the strengths of each sector.

Read more : Role of Bankruptcy Trustee in Ibc

Key Legal and Regulatory Considerations

Insolvency and the healthcare sector is required to comply with the necessary laws, regulations, and guidelines to ensure patient safety, quality care, and the integrity of healthcare systems.

i) Protecting Patient Care During Insolvency:

The IBC protects patient care during insolvency by ensuring continuity of operations through a structured resolution process, which aims to find a viable buyer for a distressed healthcare facility, which minimises disruptions to essential services. This is achieved through section 32A which protects against liabilities incurred before the commencement of the resolution process. Healthcare organisations under insolvency are subject to stricter scrutiny to protect stakeholders.

ii) Cross-Border Insolvency in Healthcare:

Taking into consideration the large-scale operations of healthcare providers, such insolvency cases often involve cross-border issues, requiring innovative solutions for creditors and stakeholders. Because of this, insolvency proceedings under the IBC for healthcare providers become complex as insolvency professionals have to navigate domestic insolvency laws and international healthcare regulations.

Challenges in Healthcare Insolvency

In addition to financial challenges and hurdles regarding patient safety, there are many other legal and regulatory challenges. These are summarised below:

i) Maintaining Stakeholder Confidence:  

Insolvency can erode patient and stakeholder confidence, impacting revenue further, and instead of the outcome of insolvency proceedings being restructuring the healthcare provider is liquidated. Therefore, establishing strategic and transparent communication is critical to retaining patient trust during restructuring.

ii) Addressing Funding Gaps:

Insolvent healthcare providers often face significant challenges in securing additional funding for restructuring, because of high interest rates, regulatory pressures, high labour costs, and the loss in creditor confidence. To ensure that the company is restructured successfully, policymakers play a critical role in bridging funding gaps through subsidies or guarantees.

iii) Regulatory Hurdles:

Insolvency proceedings must align with stringent healthcare sector regulations to avoid penalties. Non-compliance can lead to severe consequences like fines, license suspension, or criminal charges in cases of sensitive nature. 

Best Practices for Successful Restructuring in Healthcare Insolvency

i) Collaborative Restructuring:

It is crucial to encourage cooperation between creditors, management, and regulatory bodies for a seamless restructuring process.

ii) Embracing Digital Health:

The advancement of technology can be beneficial to a successful restructuring of a healthcare provider. Potential investors can invest in telemedicine, AI, and health analytics to improve efficiency and enhance patient outcomes.

iii) Strategic Financial Planning:

Conducting comprehensive financial analysis, such as financial audits and deploying experts in healthcare insolvency, can streamline asset management and liabilities. By identifying potential risks and optimising asset utilisation, companies can take proactive strategies to manage liabilities and improve their financial situation.

iv) Learning from Global Practices:

India can learn from the insolvency framework of other countries to amend the current framework for the resolution of insolvent healthcare providers. Such as the US Chapter 11 bankruptcy process by adopting a system that allows struggling businesses to restructure their debts and reorganise operations. This provides insolvents with a more efficient and flexible way to handle insolvency, enabling companies to recover and continue operating instead of facing immediate liquidation.

Practical Cases in Healthcare Insolvency and Restructuring

Judicial precedents can help understand methods to resolve financial duress in the healthcare sector and the need for 

i) Nelson Mullins Case Examples:

Nelson Mullins has expertise in the bankruptcy practice with a large team of attorneys experienced in handling diverse insolvency matters. Their case studies delve into intricate legal questions arising in bankruptcy proceedings. For instance, it also handles cases on major healthcare organisations that  used insolvency as an opportunity to reduce overheads by 20% and adopt AI-driven diagnostics, emerging stronger post-restructuring.

ii) Catalyst Example from India:

Ayushman Bharat Digital Mission (ABDM) is considered a catalyst and is a distressed hospital chain in India that utilised IBC proceedings to form strategic partnerships, resulting in enhanced operational efficiencies. This case aimed to create a unified digital healthcare infrastructure, enabling better access to healthcare services. Their digital platform streamlines patient flow by enabling easier appointment booking, referral management, and tracking of medical history across healthcare providers. 

The Future of Healthcare Insolvency

There are still several steps that may improve insolvency laws to suit the healthcare sector:

i) Role of Policymakers:

Policymakers must create sector-specific insolvency proceedings for healthcare to address its unique challenges and sensitive aspects. They can establish healthcare priorities, allocate resources, and enact reforms. By formulating policies through research and assessing the performance of healthcare providers, policymakers can create the required regulations and initiatives. 

ii) Promoting Innovation:

Encouraging healthcare providers to adopt innovative practices during insolvency can ensure long-term sustainability. It can lead to improving patient experience, the quality of care provided, and improve the overall financial operations of the healthcare providers. 

iii) Strengthening Stakeholder Trust:

Strengthening stakeholder trust in healthcare insolvency is crucial as it fosters cooperation, transparency, and a sense of stability within the healthcare system. This allows for smoother restructuring processes during financial distress which improves patient care during insolvency proceedings.

Conclusion : insolvency and the healthcare sector

Healthcare insolvency presents significant challenges, but it also offers opportunities for transformation and innovation. The impact of restructuring on patient safety has its unforeseen challenges. When a healthcare system is struggling financially, it is forced to identify areas of inefficiency, creating a strong incentive to explore new modes of care delivery. The pressure to reduce costs may lead to the healthcare provider adopting innovative technologies such as telemedicine, AI diagnostics, and remote patient monitoring, which can improve access to care and reduce unnecessary hospital visits.