What to Watch Out For — Diagnosing a Distressed Hospital
On October 24, 2017, the United States Bureau of Labor Statistics (“BLS”) released its employment projections for 2016 through 2026. The BLS projects that over the next decade employment will increase by 11.5 million jobs. Moreover, BLS projects that “[h]ealth care industries and their associated occupations are expected to account for a large share of the new jobs projected through 2026…” Notwithstanding this optimistic outlook, the number of distressed hospitals and healthcare providers has increased over the past year.
Diagnosing a financially distressed hospital or healthcare facility is similar to diagnosing any industry in trouble. Once there are early warnings signs it is imperative to get the right help. This may be the single most important decision to save a struggling hospital from closure. Moreover, any creditor should also obtain qualified professional help when doing business with a hospital facing a shutdown. Many financial problems—like patients- are more difficult to “treat” the later that help is sought.
News of distressed hospital and healthcare facilities has increased dramatically. Within the past twelve months, several high-profile healthcare facilities have filed for Chapter 11 bankruptcy protection, including:
1. Preferred Care Partners, one of the largest operators of nursing homes and its related affiliates filed for chapter 11 Bankruptcy on November 14, 2017.
2. Phoenician Medical Center and its related affiliates filed for Chapter 11 bankruptcy August 24, 2017.
3. Cypress Urgent Care and 5 other of its affiliates filed for chapter 11 relief on August 2, 2017.
4. Morehead Memorial Hospital a 108 bed non-profit hospital in Eden, N.C., filed for Chapter 11 bankruptcy July 10, 2017.
5. Acadiana Management Group, which runs post-acute hospitals across several states, filed for chapter 11 relief on June 23, 2017.
6. Premiere Medical Management Group, a multispecialty medical group, filed for Chapter 7 bankruptcy June 15, 2017.
7. 21st Oncology Holdings, a cancer care services provider, filed for Chapter 11 bankruptcy May 25, 2017.
More are expected!
Additionally, numerous hospitals have seen their credit ratings downgraded. Further, rural hospitals, including Critical Access Facilities (CAH), are closing at an alarming rate.1 The failure to maintain these types of facilities impacts the ability of patients seeking urgent care for life threatening situations. Moreover, rural hospitals typically provide a significant source of employment and business trading opportunities in these rural areas.
Creditors of healthcare facilities, including the professionals and trade vendors, need to be proactive to maximize the prospects of a successful turnaround or bankruptcy process, which often times is also the best way to ensure a long lasting customer and the recovery of any losses. The following are warning signs that warrant heightened scrutiny and proactivity: planning:
a. Reduced or delayed reimbursements to the health care provider;
b. Shifting community needs;
c. New or changing legislation and regulations;
d. Employment issues;
e. Reports of compliance deficiencies;
f. Material reductions in charitable giving to the hospital; and
g. Significant litigation that could have a material adverse effect on the facility or its operations.
Hospitals provide medical services and seek to get paid for these services. However, the financial viability of a hospital is more complicated. The facility may depend upon on governmental assistance. Its status as a “for profit” or “not for profit” facility may also impact its overall financial health. Finally, its ability to provide ancillary or additional services to generate different or “non-traditional” revenue streams may further impact its bottom line.
Generally speaking, most for profit healthcare facilities receive revenue from three primary sources: (a) government reimbursement (Medicare/Medicaid); (b) private insurance companies; and (c) private pay from individuals. Typically, the private insurance and private pay provide the highest reimbursement rates and help “bridge” the gap on government reimbursement that usually does not cover the full cost of services. Not for profit health care facilities often also receive significant financial support from charitable giving.
However, recent analytical scholarship on the profitability of hospitals (both for-profit and not-for profit) shows that more than half of all hospitals in the U.S. are unprofitable (41 percent) or highly unprofitable (14 percent). Only 45 percent are profitable. Half of all U.S. hospitals lost $82 or more on patient care services for each patient discharged in 2013. See “A More Detailed Understanding of Factors Associated with Hospital Profitability” Bai Ge and Anderson Gerard, Health Affairs Vol. 35 No. 5 (May 1, 2016).
Similarly facilities that rely on a single source private insurance plan (i.e., the largest employer in a region) need to be wary of local employment changes that could put such private insurance plan at risk. If the facility loses the ability to supplement its reimbursement mix and is left solely with government reimbursement, the lower government reimbursement rates could put the facility at risk.
Likewise, healthcare facilities need to constantly be mindful of increasing operational costs. Rural facilities are also at greater risk of rising costs impacting their financial health. These facilities often do not have the economies of scale or lower cost options to obtain the goods and services that are required to run the facility. Additionally, the cost of providing services is usually higher at these facilities. Accordingly, both the facility and service providers need to be aware of any issues that could change rapidly in the marketplace that would increase costs.
Even with the prognosis that demand for healthcare services will increase over the next ten years, the consistent rise in healthcare facility bankruptcies shows the risk in operating and doing business in this sector will continue to be challenging. Based upon the types of services provided and the community need for these facilities, particularly in rural areas, government regulation will continue to be a significant factor in the equation. But like most industries, a forward looking approach and proper planning can often be the best way to avoid financial distress. Paying attention to the early warning signs and being proactive doesn’t just apply to the patient- it applies to healthcare facilities too, and it may be the difference between being financially viable or becoming another statistic.
1 For example the Copper Basin Medical Center in Copperhill, Tennessee closed citing a lack of working capital. However, no bankruptcy has been filed as of yet.
Isaac M. Marcushamer (left) and Brian G. Rich (right) are partners on the Business Reorganization Team at Berger Singerman who have handled healthcare restructurings and fraud-related bankruptcy matters.