Hospital bankruptcies a result of trends, not a single event

How does a good hospital find itself facing bankruptcy? By ignoring signs of deteriorating financial performance until its too late.

Amy Landry, assistant professor in the Department of Health Services Administration at the University of Alabama Birmingham, recently concluded a study on hospital bankruptcies and she found that in most cases there were plenty of signs that hospitals were in trouble, but they were ignored. Most of the hospitals didn’t have “a bad year” that caused the financial difficulty. They were following a downward trend over time: decreasing volumes, reimbursement changes, and deteriorating physician relationships.

While 67 percent of hospitals that filed for bankruptcy eventually closed, one-third completed a re-organization. Landry wanted to look at the root causes and found that “most of the time there was a culmination that led to this that included poor financial management or poor management in general.”

The study looked at a six-year period from 2000 to 2006, during which 42 acute-care hospitals across the nation filed. They used data from the American Hospital Association and trade publications to get detailed information on the organizations.

What they found was that filing hospitals tended to be smaller, not part of a health system and were more likely to be in the Northeast or West Coast. Many factors were involved, including poor financial management, changes in payer mix, reimbursement reductions, overzealous construction and purchasing of physician practices, decrease in volume and demographic shifts that were the impetus for filing.

It was often a combination of factors that were to blame, Landry said. Hospitals might decide to make a long-term change like a large building project that occurred in the midst of declining patient volume or changes in payer mix. “There was no sensitivity analysis,” she said. “It would have helped to have been conservative and understand reimbursements can change at any time.”    

“They need to be cognizant of these things and if they are paying attention, they can right the ship,” she said.

Using something like the Altman Z-Score (which is a predictor of whether or not a company will file for bankruptcy) can be a good idea, she said. The tool takes into account factors like working capital, earnings, equity value and sales.

Gloria Bazzoli, professor of health administration at Virginia Commonwealth University, has also performed studies on hospitals that file bankruptcy. She said she often found deterioration in certain key indicators prior to filing including declining occupancy rates, increasingly poor payer mixes and more uninsured patients that cause a decline in equity.

Organizations often overlook the signs and wait until they are in a very poor financial condition before filing. The ability to turn around at that point is small, Bazzoli said. If they start pursuing strategies to change earlier, they have a better chance at not filing or restructuring afterward. This is often the case, particularly with nonprofits, which she said are less apt to cut their losses early. They are, however, more likely than for-profits to bounce back afterward because of greater funding opportunities.

Restructuring after a bankruptcy can be successful and Landry said it depends a lot on payer mix, volume of patients and services lines. An organization that is in a bad area or where competition is too high might not be able to come back. Hospitals will have to evaluate their service lines and focus on the profitable ones. Bazzoli said survivors tended to undergo major changes like significant reduction in the number of beds available and acquisition.

Bazzoli urges hospitals to look at the issue from a positive perspective. First, bankruptcy can be a good way for hospitals to get debt relieved and be purchased by a system or other hospital. It gives some time to pause and think about how they will move forward. About half of hospitals she has analyzed in her research closed after filing, as opposed to the two-thirds in Landry’s study.

“Considering how bad a financial position these hospitals were in, you can say the glass is two-thirds empty, but it may be better to say it is one-third full,” Bazzoli said. “The fact that one-third were able to turn around is remarkable … and is a positive view on the success of bankruptcy filing.”