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How the Silicon Valley Bank Collapse Could Affect the Healthcare Industry

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Following the disastrous aftermath of the 2008 banking crisis and the subsequent “Great Recession,” financial institutions faced a loss of consumer trust and confidence. As complex financial instruments plummeted, terms such as risk management, financial stability, and transparency steadily began entering the mainstream lexicon.

Fast-forward to 2023, and we find ourselves at another reflection point. The collapse of Silicon Valley Bank (SVB) — a financial institution catering to startups and investors — brings to mind echoes of widespread bailouts and questionable banking practices of the past. 

The collapse of the SVB has far-reaching consequences for various stakeholders, including consumers, investors, banking institutions, startup companies, and citizens in the broader global economy. According to Advisory Board researchers, some notable SVB clients “include home healthcare provider Dispatch Health; primary care company Oak Street Health, which CVS Health is currently acquiring; and physician enablement company Privia Health.”

“While the collapse is particularly relevant to the tech world, it also affects the healthcare industry resulting in a ‘survival of the fittest’ scenario,” explains Roy Bejarano, CEO and co-founder of SCALE Healthcare. As Bejarano explains, SVB was positioned as a primary lender for a wide range of venture-backed healthcare companies in an industry that has already been subject to significant volatility and disruption following a global pandemic, rampant inflation, and a shortage of healthcare workers.

Bejarano predicts that as debt markets struggle, with high yield spreads widening and a decrease in debt issuance, investment in healthcare assets will weaken along with most other industries. This could lead to what he explains as “the survival of the fittest scenario,” with only the most substantial, established companies able to survive and thrive. This is worrying, as smaller start-up companies rely on being able to strike deals and borrow money to support operations.

“Ultimately, this could lead to reduced innovation and progress in the healthcare industry as smaller players struggle to keep up and larger companies dominate the market,” Bejarano cautions. Therefore, it is essential to keep a close eye on these developments and take steps to support smaller players in the industry to ensure a healthy and competitive market for all.

The impact of SVB Financial Group’s collapse on the healthcare industry — despite its potentially far-reaching effects — has received little attention. Unfortunately, this may exacerbate the challenges already faced by the industry.

Survival of the Healthiest

SVB’s strong presence in the tech industry has led to a concentration of revenue from private equity and venture capital players, meaning that SVB caters to a narrower range of sectors than other banks. To ensure financial stability, banks have regulations in place to prevent reckless lending and maintain sufficient liquidity. However, SVB’s decision to purchase treasury bonds in a low-interest rate environment to increase profits backfired when the Federal Reserve abruptly increased interest rates, resulting in significant losses for the bank.

Typically, banks would use their deposits to cover losses and adjust their strategies accordingly. But when rumors about SVB’s losses began spreading, investors, firms, and consumers started withdrawing their deposits, leading to a collapse due to the bank’s lack of general funds. 

“The bank tried to raise money by selling its treasury bonds,” Bejarano explains, “which led to further panic and losses. As a result, healthcare companies and startups that relied on SVB for funding and financial services were affected.”

Risk, risk, and more risk

The collapse of SVB and other mid-sized lenders such as Signature and FR have had significant impacts on the healthcare industry. “With concerns about the banking system’s stability, the cost of capital has risen, making it more difficult for small, medium, and even large companies to access funding,” explains Bejarano. Perception led to the panic of mass withdrawals from SVB, which led to its collapse, and now investors, surveying a landscape filled to the brim with layoffs and restructuring, are hesitant. 

According to Healthcare Dive, SVB announced commitments in the hundreds of millions to companies such as “Privia Health, a patient and provider tool company.” In addition, Healthcare Dive explains that “the bank also had backed venture rounds of companies like Olive, Carrot, Komodo, and DispatchHealth, according to Fierce Healthcare.”

These events have had an incredibly detrimental effect on the healthcare industry, which relies heavily on investment and funding for research and development and expanding services. In this “large wins” environment, small and medium-sized assets struggle to compete with the industry’s more prominent, established players, which include more well-known banks such as JPMorgan Chase, Citigroup, and Bank of America. 

“As a result,” Bejarano says, “monopolies may begin to appear which will not only ultimately consume weaker competitors, but also severely reduce and weaken market choices available to consumers. This trend is especially concerning in the healthcare industry, where access to various healthcare services and products is essential.”

The potential impact of SVB’s collapse on the healthcare industry cannot presently be overstated. While the broadest ripple effects have yet to be identified, it appears that the healthcare industry may indeed be heading toward Bejarano’s aforementioned “survival of the fittest” scenario.

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