Why Experts Saw Cano Health’s Bankruptcy Coming From A Mile Away

Following a tempestuous 2023, senior-focused primary care provider Cano Health made headlines once again this week. The company — which went public in 2021 through a $4.4 billion SPAC merger — filed for Chapter 11 bankruptcy on Sunday. 

The industry reacted without surprise, with experts calling the bankruptcy a direct result of mismanagement, a quixotic growth strategy and poor market selection. 

In a filing with the U.S. Bankruptcy Court for the District of Delaware, Cano reported $1.2 billion in assets and $1.4 billion in debt. The filing was supported by lenders holding approximately 86% of the company’s secured revolving and term loan debt and 92% of its senior unsecured notes.

“This agreement enables Cano Health to substantially reduce its debt and position the company to achieve long-term success,” the firm said in a press release.

The company also announced that it received a commitment of $150 million in debtor-in-possession financing from certain existing secured lenders. This funding, which is subject to court approval, is meant to keep Cano running during the restructuring process.

Cano said it expects the courts to approve the restructuring in the second quarter of this year.

The bankruptcy filing comes less than a year after three of Cano’s board members publicly resigned in protest of its governance strategy. They left in late March — a time when the Miami-based company’s stock had dropped 80% in 12 months. (For those wondering, Cano’s stock was trading at $0.26 per share as of Thursday.)

One of the board members who stepped down was Barry Sternlicht, the billionaire CEO of Starwood Capital Group. At the time, he issued a blistering press release, expressing that he had been “extremely troubled” by the company’s “poor operating decisions and performance” over the past two years.

He pointed out that Cano had received about $1.49 billion in gross proceeds when it went public, and those proceeds included about $800 million from private placement investors including himself, as well as blue chip investors like Fidelity, Third Point Capital, Maverick Ventures, BlackRock and Owl Creek Partners.

“Fast forward to today, this management team has expended nearly all this cash and the company has not enjoyed any demonstrable improvement in its core profitability,” Sternlicht wrote in the press release.

Cano’s governance structure caused the company’s stock price “to be decimated, dropping over 90% from its debut,” Sternlicht added. He also lamented that the company has been “saddled with a crippling debt burden.”

Sternlicht wrote that he had directly communicated his concerns to his fellow board members and Cano CEO Marlow Hernandez “on numerous occasions,” only to be ignored. He called for Hernandez to be removed from his position as chairman and CEO, calling his continued tenure “harmful to the interests of stockholders and to Cano employees.” Hernandez ended up stepping down in June.

Like many healthcare experts, Howard Forman — a professor of radiology, public health and economics at Yale — had been following the Cano drama last year. In an interview this week, he said that he found the news of Cano’s bankruptcy “so, so unsurprising.” 

He said he recently mentioned Cano in a conversation with Harlan Krumholz, another Yale physician professor with whom he hosts a podcast. Last month, Forman told Krumholz that he thought they should talk about the downfall of Cano in one of their episodes.

“I had a list of SPACs that had spectacularly blown up. As I was studying Cano, I saw what a complete mess it was — between what appears to be mismanagement, probably overly aggressive growth, and then just really bad timing in terms of targeting the Medicare Advantage market at the worst possible time,” Forman declared.

He added that Cano was “constantly raising money that was diluting shareholders at every step of the way,” and that the company has never been able to “effectively pay their bills on their own.”

It’s important to note that when Cano went public, the market for senior primary care was rather favorable. In the past couple years, primary care companies have been ripe targets for acquisition. 

Many of Cano’s rival companies were recently acquired for billions of dollars. For example, Amazon acquired One Medical for nearly $4 billion in 2022. Last year, Walgreens‘ VillageMD bought Summit Health for nearly $9 billion, and CVS acquired Oak Street Health for $10.6 billion.

Value-based care primary care companies, such as those mentioned above, have proven that they’re able to do well amidst uncertain economic conditions, Forman noted. Cano’s focus on getting big quickly was what accelerated its downfall, he said.

Anu Sharma, CEO of maternity-focused startup Millie Clinic, agreed with Forman.

“The company raced to launch new markets and unrelated service lines — all of which take capital and time to mature,” she remarked.

She added that the Cano’s core Medicare Advantage business “imploded” after CMS cracked down on risk adjustment coding loopholes — and that this forced “an inevitable reckoning.”

In her view, Cano serves as yet another reminder that care model durability and disciplined market selection are the keys to winning in healthcare.

Photo: bestdesigns, Getty Images

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