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Bankruptcy for Cano Health Seems Imminent. What Went Wrong?

Analysis  |  By Melanie Blackman  
   August 25, 2023

Between faltering financial results, lay-offs, and rating downgrades, the odds of viability are stacked against the company.

While the financial outlook for larger, for-profit hospitals and health systems is slowly improving, there are still substantial challenges for CEOs of healthcare organizations of all sizes when moving profits from the red to the black.

Value-based primary care provider Cano Health is one example of a struggling healthcare organization. In fact, Cano is facing what Moody's says is impending bankruptcy.

Between faltering financial results, lay-offs, asset liquidation, rating downgrades, and leadership shake-ups, the odds of viability are stacked against the company.

So how did Cano get here?

Financial results spurred major changes

Cano Health recently announced its Q2 financial results for 2023, which including the organization's plan to exit operations in California, New Mexico, and Illinois by the fall of 2023. As of the end of June, those geographies accounted for approximately 5,000 total members and 17 medical centers, according to Cano Health.

The company also plans on exiting operations in Puerto Rico by 2024, which has approximately 8,000 members cared for by affiliates. This move will allow the organization "to focus on and optimize its core MA and ACO REACH assets in its core geographies," it said in a statement.

In addition, the organization is consolidating operations in Texas and Nevada, reducing the amount of medical centers in each state. The core Florida market will experience prioritize projects and initiatives to enhance patient care.

"These strategic and operational steps are critical to improving our financial performance, generating greater efficiency, and improving health outcomes for our members to ensure the organization’s long-term success," Canoe Health said.

During Q2 2023, Cano Health experienced a 25% increase in total membership to 381,066 members and a total revenue increase of 11% year over year to $766.7 million.

But the organization experienced a net loss of $270.7 million, which was a significant increase from the net loss of $14.6 million experienced the year prior.

According to Cano Health, the net loss was driven by "a higher operating loss due to lower-than-expected Medicare Risk Adjustment revenue," the organization said, resulting in MRNA revenue $58 million lower than previous estimates. Net loss was also attributed to an increase in third-party medical costs, "a change in the reserve for other assets related to MSP Recovery Class A common stock, change in fair value of warrant liabilities," and an increase in interest expenses.

With the company's liquidity at approximately $101 million on August 9, consisting of cash and cash equivalents, Cano believes that this amount of liquidity is not sufficient to cover its operating, investing, and financing uses for the next 12 months. "Management has concluded that there is substantial doubt about the company's ability to continue as a going concern within one year," Canoe said in a statement.

Company downgrades and layoffs

Subsequently, Moody's downgraded Cano Health's corporate family rating from Caa3 to Ca, and it upgraded its probability of default rating from caa3-PD to Ca-PD. Moody's has also forecasted that Cano will continue to have negative free cash flow.

"The ratings downgrade reflects Moody's view that Cano's capital structure is unsustainable, that the probability of a bankruptcy or major restructuring is high, and that recovery rates for much of the company's debt will be low," the investors service said in a statement.

Moody’s went on to say that Cano’s ongoing decline in profitability, weak liquidity, and Moody's expectation that operating performance will continue to deteriorate given the higher costs and rising interest rates.

The ratings downgrade by Moody’s followed Cano's announcement that the operational challenges anticipated in 2023 and the current liquidity situation is not expected to cover operating, investing, and financing needs for the next 12 months.

In response to the poor financials, the organization reduced its workforce by 17%, which resulted in letting go of 700 employees. This move is expected to yield approximately $50 million annualized cost reductions beginning in Q3 2023 through the end of 2024, according to Cano Health.

Additionally, the organization "expects to record a restructuring charge in the third quarter of 2023 of approximately $4 million, the majority of which will be paid in 2023 and a lesser amount in 2024, consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits."

Leadership update

Not even two weeks following the financial results announcement, Cano Health announced that Mark Kent, who joined the organization to serve as chief strategy officer in January and who has served as interim CEO since June 16, is now the organization's permanent CEO.

"Cano Health is evaluating strategic interest in the company to ensure we continue caring for our patients, while maximizing value for our stakeholders," Kent said in a statement about the organization's financial results.

"Our mission and vision remain the same, however, the strategy and tactics needed to realize the profitability inherent therein requires a refreshed approach with a solid operating foundation. Cano Health took critical strategic steps during the second quarter of 2023 that are intended to accelerate our strategy to enhance operational efficiency and execute on the plan to improve the management of our medical costs."

At this point, it’s unclear what the future holds for the struggling organization. No investor could mean bankruptcy.  

Melanie Blackman is a contributing editor for strategy, marketing, and human resources at HealthLeaders, an HCPro brand.

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