Private equity-owned businesses accounted for a high number of bankruptcies in the health care sector last year, and another wave of distress looms, according to a new report from an advocacy group that monitors the sector.

PE-backed firms accounted for at least 17, or about a fifth, of the 80 bankruptcies of health care companies last year, the Private Equity Stakeholder Project said in a report due to be released Wednesday. It called 2023 a “record year” for large health care bankruptcies. Also, venture-capital-backed companies made up another 12, or 15%, of the filings, it said in a study that looked at companies with liabilities of more than $10 million.

“The health care default and bankruptcy wave is projected to continue in 2024 as companies are increasingly facing credit rating downgrades and potential defaults – and most of the companies at the highest risk are owned by private equity firms,” PESP wrote.

Two of the largest bankruptcies last year were KKR Group Co.-owned staffing company Envision Healthcare Corp. and cancer-treatment provider GenesisCare. Another KKR-backed company, Global Medical Response, has more than $4 billion in debt due next year and has launched talks about amending and extending those obligations, Bloomberg has reported.

“This agenda-driven group exists only to attack the private equity industry – not provide credible research,” a spokesperson from the industry group American Investment Council said in an e-mail. “The reality is that the health care system needs more capital and private equity has a strong record of investing in health care facilities and programs that improve lives.”

The pandemic upended health care arguably more than any other industry as hospitals halted all but essential treatments, nursing homes went into lockdown and costs for workers and supplies soared. Today, higher expenses are still squeezing margins and putting many providers at risk of distress and bankruptcy.

For private equity, the playbook of issuing debt and finding efficiencies often isn’t working in this high-rate market and tough business environment, leaving cash-strapped companies with debt burdens and limited access to capital.

Increased regulation has also played a role in health care distress. The No Surprises Act requiring more billing transparency that took effect in 2022 contributed to the bankruptcies of Envision, American Physician Partners and ambulance company Air Methods Corp. last year.

Private equity “adopted the roll-up strategy,” and levered up when interest rates were low, Ola Hannoun-Costa, associate managing director at Moody’s Ratings, said in an interview. With maturities coming due, “we’re seeing a rise in defaults in the form of a distressed exchange.”

Moody’s has predicted more health care defaults this year, saying credit quality is falling, with more than 60% of borrowers rated B3 negative or lower characterized by weak liquidity and more than 90% by excessive leverage.

About 90% of those in the most at-risk categories are PE-owned, Moody’s says, and many are in fragmented areas like emergency medicine and anesthesiology that are targets for consolidation.

Because of the challenges facing the sector, “access to the market for some of these companies can be limited,” Hannoun-Costa said. On the other hand, the scale PE firms can bring with acquisitions has advantages, including better access, she said.

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