Nursing Home Declares Bankruptcy, Blames Recent Cyberattacks

A Midwest operator of nursing homes has filed for bankruptcy, citing the effects of a ransomware attack last fall and fallout from the recent Change Healthcare outage as factors that contributed to its financial woes.

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SC Healthcare Holdings LLC, which operates as Peoria, Illinois-based Petersen Health Care, in federal court filings on Wednesday said it is seeking Chapter 11 bankruptcy protection because of ongoing financial problems stemming from an October ransomware attack and disruptions in payments from payers caused by the recent cyberattack on Change Healthcare, plus a host of other challenges.

The other issues include lingering effects of the COVID-19 pandemic, difficulty in recruiting staff, and inflationary pressures on food, drug and medical supply costs.

On Friday, Sen. Mark Warner, D-Va., introduced legislation that would allow the government to advance and accelerate payments to cash-strapped healthcare providers in the event of a cyber incident, as long as the providers and their vendors meet minimum cybersecurity standards determined by the U.S. Department of Health and Human Services.

Warner’s Health Care Cybersecurity Improvement Act of 2024 proposes to modify the existing Medicare Hospital Accelerated Payment Program and the Medicare Part B Advance Payment Program by requiring HHS to determine if there is a need for advance or accelerated payments to healthcare providers due to a cyber incident, providing that the organization meets minimum cybersecurity standards.

“The recent hack of Change Healthcare is a reminder that the entire healthcare industry is vulnerable and needs to step up its game,” Warner said in a statement on Friday.

The Change Healthcare attack “paralyzed billing services for providers nationwide, leaving many in danger of becoming financially insolvent,” Warner said.

Petersen’s Financial Woes

Petersen operates 90 nursing homes that have a total of more than 6,700 beds and employs 4,000 workers in Illinois, Iowa and Missouri, according to court documents. In 2023, its annual operating revenue exceeded $339.7 million, the documents say.

The company has $295 million in debt, including $45 million owed under loans insured by the U.S. Department of Housing and Urban Development, according to court papers.

Soon after the company saw media reports of the Feb. 21 Change Healthcare cyberattack, Petersen Health Care “noticed reimbursements from certain payers slowing and subsequently heard affirmatively from payers that amounts owed to the debtors were being suspended due to the Change cyberattack,” said David Campbell, Petersen’s chief restructuring officer, in a court document.

While Petersen continues to assess the impact of the Change Healthcare attack, “there is no question it has had a material impact on the debtors’ liquidity profile,” Campbell said.

Pressures related to the Change Healthcare attack add to the difficulties Petersen is still dealing with in the aftermath of its own ransomware attack in October by a group identified as White Ninja, Campbell said in court papers.

The attackers infiltrated many of the Petersen systems, affecting the company’s access to historic and current billing records, other books and records and emails, Campbell said.

“The debtors quickly contacted a consultant to assist in remedying the impact of the ransomware attack and provided notice of the attack to the FBI,” he said. While Petersen is back online with new servers, email addresses and replacement software, “a significant amount of the debtors’ books and records were lost in the attack, leading to incredible difficulty and delay in pursuit of the debtors’ accounts receivable, which is a crucial part of the debtors’ income,” Campbell said in the court document.

As these difficulties mounted, “debtors faced liquidity issues and subsequently fell into default with their various credit facilities,” he said.

“Given the debtors’ need to continue providing care to their residents, the debtors, in consultation with their advisors, deemed it necessary to forego principal and interest payments owed to their lenders and ensure continued critical resident care continue,” Campbell said. “As these defaults mounted, receivership cases were filed, and the debtors’ liquidity issues worsened. The filing of these Chapter 11 Cases became necessary after the debtors’ existing lenders declined to provide additional financing.”

Petersen Health Care did not immediately respond to Information Security Media Group’s request for additional information pertaining to its bankruptcy filing.

Rampant Sector Challenges

Petersen in court papers describes itself as one of the largest nursing home operators in the U.S. But much smaller medical providers across the country are especially feeling the impact of the Change Healthcare attack on their claims processing and broader financial operations.

Albany, Mississippi-based Advanced Obstetrics & Gynecology PC filed a proposed class action complaint on March 14 on behalf of the practice and “all medical providers within the U.S. who have suffered delays in processing claims and revenue cycle services” from the cyberattack on UnitedHealth Group’s Change Healthcare unit (see: Cash-Strapped Women’s Clinic Sues UnitedHealth Over Attack).

The women’s health clinic said it and “hundreds, if not thousands” of medical providers are facing the prospect of bankruptcy due to severe cash flow and related financial problems caused by the Change Healthcare IT outage.

Financial ratings firm Fitch Ratings this week issued a report warning that the Change Healthcare cybersecurity incident could negatively affect the credit profiles of smaller healthcare providers, pharmacies and other companies that rely on Change for working capital-related services.

“We are assessing the degree to which companies’ cash flows have been disrupted following the cyberattack on Change on Feb. 21, the adequacy of existing liquidity sources, and the likelihood and sufficiency of other sources, such as shareholder and lender support, and whether and when issuers switched to other service providers,” Fitch said.

Fitch added that it is also considering the temporary liquidity sources provided by UnitedHealth Group and the Change Healthcare/Optum accelerated payment plan announced by HHS’ Centers for Medicare & Medicaid Services on March 9.

Change Healthcare has been slowly restoring access to certain IT functionality, and UnitedHealth Group had promised that additional services, including claims processing, were slated to begin coming online this week.

“We believe any credit implications are likely to be limited to smaller companies due to their limited financial flexibility to withstand even temporary cash flow disruptions,” Fitch said. “These companies tend to be rated in the “CCC” or low-to-mid “B” categories, indicating very low margins of safety. Companies that have borrowed from direct lenders, such as private credit lenders, may be able to negotiate temporary relief in coordination with lenders and shareholders.”

Fitch said it assumes that higher-rated companies, which are typically publicly traded, have sufficient flexibility to withstand such disruptions. “This is supported by most publicly traded issuers not viewing the event as material enough to warrant filing 8-Ks. However, details on the financial implications for all companies affected by the incident will become clearer after 1Q24 results are reported,” Fitch said.

“The financial hit taken by smaller providers as a result of the Change Healthcare attack is not over and will reverberate for some time – including loss of employees and patient flight,” said Mike Hamilton, founder and CISO of security firm Critical Insight.

The potential challenges ahead for entities affected by the attack will also continue to mount, he said. “If, as has been suggested, there are still records held in abeyance and those become public, each provider will be required to file its own data breach report and may be subject to litigation and further regulatory scrutiny” (see: The Next Big Bombs to Drop in the Change Healthcare Fiasco.)

The Change Healthcare attack is an example of a “cascading failure” and an issue that the Department of Homeland Security critical infrastructure protection ecosystem has studied through government and sector coordinating councils, Hamilton said.

The attack also highlights the potential impact when vendors of critical IT products and services go through mergers and acquisitions that create large, dominant suppliers with few other choices left. UnitedHealth’s Optum unit acquired Change Healthcare in 2022 but prior to that, the company had been through a series of other mergers and acquisitions.

“Because the consolidation of financial services to nearly a single provider nearly caused the healthcare sector to fail, it is very unlikely that further attempts to consolidate key services will survive the scrutiny of DHS, which will be advising the U.S. Securities and Exchange Commission and other agencies on risks posed by such consolidations, and that is a lesson learned,” Hamilton said.

HHS in January, as part of the Biden administration’s strategy to improve the state of cybersecurity in healthcare, issued guidance that details voluntary “essential” and “enhanced” cybersecurity performance goals for the sector (see: HHS Details New Cyber Performance Goals for Health Sector).

Those CPGs are likely to be among the HHS-determined “minimum cybersecurity standards” healthcare entities would need to meet in order to qualify for advanced or accelerated Medicare payments in the wake of a cyberattack, if Warner’s proposed legislation moves forward.

The Change Healthcare attack will result in more government regulation, said Jake Milstein, chief revenue officer at Critical Insight.

“The HHS cybersecurity performance goals are voluntary. Expect them to become mandatory,” Milstein said.

Errol Weiss, chief security officer of the Health Information Sharing and Analysis Center, said that the Change Healthcare attack has put a spotlight on several critical needs in the healthcare sector.

“HHS should be providing assistance during critical incidents. In the Change Healthcare incident, they should be providing financial assistance – loans – to impacted providers and let UHG focus on restoration efforts,” he said.

Weiss said a public/private task force should be created to complete a systemic risk analysis across the healthcare and public health sector, funded by HHS, “similar to what was done in the financial services sector a decade ago.”

He also said the public and private sectors should be pre-planning for – and regularly exercising for – a critical sector incident with wide-scale effects.

“The health sector would benefit from more planning and exercising those plans, so that the HPH is more prepared to respond during the next incident.”