A Prescription for Struggling Hospitals

By T. Mills Fleming, special to Fulton Daily Report

Many hospitals around the country are on life support, and Georgia hospitals are no exception. Unfortunately, the problem is getting worse. In my 24 years of advising hospitals through the paradigm shifts impacting the noble mission of caring for the health of our communities, I did not see a single hospital bankruptcy case. This year alone I’ve handled two.

Diagnosis

Given the symptomatic strain of shifting market forces, higher costs, lower revenues, and changing healthcare reimbursement, hospitals today face a disease which, if left untreated, will lead to a calamity of maladies and, quite possibly, institutional morbidity.

Causation

1. Increased operating costs. Hospital expenses — including personnel, supplies, technology, and borrowed capital — continually outpace revenues. While the new frameworks made available by modern technological advancements represent dramatic improvements in patient care, their impact on already strained budgets can be disastrous. For instance, MD Anderson Cancer Center in Houston attributed a 56.6 percent decrease in income to the implementation of Electronic Health Records (EHR).
2. Decreased reimbursement from government entities. The Patient Protection and Affordable Care Act (ACA) has had serious implications for hospital financing. For example, the ACA greatly reduced Medicare Disproportionate Share Hospital (DSH) payments, so that many hospitals no longer receive government subsidies which were responsible for easing the burden of underinsured patient care — yet these patients still require treatment. In FY 2016, Medicare DSH payments were further reduced by $1.2 billion compared to FY 2015.
3. Dwindling revenue. Many hospitals have experienced significant declines in reimbursement from private payors. This decline can be compounded by poor billing and revenue cycle management, decreased in-patient admissions, readmission penalties, and the exodus of privately insured patients to physician-owned surgery centers. In an industry where expenditures cannot be passed on to the patient and the variable costs are out of managerial control (namely, treating every patient who arrives, as required by governmental regulations), these factors combine to weaken a hospital’s already fragile balance sheet.
4. Poor management. Financial woes are not confined to external forces. In fact, some hospitals are thriving in large part because they have top-tier managers who understand the business and adjust their care delivery models to address these market forces. Too often, management blames poor financial performance on factors beyond hospital control, but outstanding leaders can frequently find solutions — primarily through controlling expenses, redesigning operating models to be more efficient, improving patient care quality (and decreasing average length of stays), standardizing clinical processes, and investing in profitable ventures.

Treatments and outcomes

1. Corporate restructuring. Mergers, acquisitions, affiliations, and partnerships can serve to streamline governance as stand-alone hospitals become a model of the past. This is achieved through improving buying power, increasing access to capital, and consolidating non-clinical services such as management, IT, HR, finance, purchasing, and billing and collections. Depending on the initial and resultant corporate structures, the arrangement may need to be approved by the state attorney general.
2. Bankruptcy. Some hospitals may be in such dire financial straits that the best alternative is to file for bankruptcy protection. This can be done under Chapter 7, as a liquidation proceeding, or under Chapter 11, in order to restructure the debt. While this can be an effective means of shedding liability and transferring assets, bankruptcy is never a simple solution in the context of the heavily regulated healthcare industry.
3. Closure. In extreme and terminal cases, the only option is to close the hospital. Such closures impact not only the facility itself but also the community at large. In many communities, hospitals are major employers and economic engines. Additionally, closing a hospital is a vast undertaking involving the HIPAA-mandated coordination of medical records, disposition of hospital assets, termination of provider numbers, protection of the hospital facility from vandals, EPA-compliant disposal of hazardous materials, payouts from benefit plans, and notifications to other governmental agencies.

Recovery

Hospitals are experiencing a symptomatic progression of corporate distress and while the causes are complex, so must be the cure. No doubt, the struggle to survive may well provide much-needed impetus for change. That change needs to come from a prescription not based on a placebo but on an antidote that will treat the malady before it becomes malignant. In the end, the classic adage holds true: Adapt or perish.

Reprinted with permission from the November 6, 2016 edition of Daily Report. © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.