Sick Hospitals

With all of the changes in the American healthcare industry, there are bound to be some casualties (pun intended). Becker's, which is my favorite resource for everything healthcare related, had an article yesterday listing the seven acute-care hospitals and health systems that have filed for bankruptcy protection or announced their closure in the first quarter of 2014. You can read the full article here.

Becker's also uses the MedPAC report to outline some of the signs of a beleaguered hospital, which includes qualitative and quantitative measures, such as low occupancy rate and a high readmission rate.

So what can be done for the troubled hospitals? The first step obviously has to be operational and financial restructuring. Working alongside lenders and banks, the hospitals can come up with terms that are manageable to the debtor and acceptable to the creditor.

Operational improvement can come from many different areas. Proper management of working capital can unlock a great deal of value. A good billing company may be able to save money by filing claims properly to expedite reimbursements from insurance companies. Moreover, it can be helpful to forecast scenarios with various levels of reimbursement rates to come up with a payables strategy. If there is a way to match payables timing with reimbursement timing, that would be ideal. Working with vendors and maybe even consolidating them or using intermediaries can go a long way in managing payables.

M&A is also a good way of keeping health systems alive since a larger entity can have more leverage with the payers, vendors and staff. Here's more:

"Although Mr. Beith (of Crain Brothers & Company) says the number of healthcare organizations that fit the profile of troubled hospitals that face an "inevitable transaction" has declined as more consolidation occurs, the market is still "fairly robust" for smaller hospitals with big financial problems. He says more aggressive buyers such as Ontario, Calif.-based Prime Healthcare Services are still willing to take on troubled facilities.

"We still see a reasonable three- to five-year runway of significant merger and acquisition activity," Mr. Beith says. "We'll continue to see financially stressed hospitals pursue transactions."

Michael Lane, a managing director with Hammond Hanlon Camp, predicts troubled hospital sales will actually pick up as merger and acquisition activity in general continues at a rapid pace and more independent hospitals realize they can't survive on their own.

Additionally, he says he has observed some of the "big guys" in the hospital industry still see strategic value in acquiring a struggling facility that they can rehabilitate with the right management, expertise and oversight. 'There are some strategic opportunities the smart acquirers don't shy away from, as larger health systems look to grow in size and expand their market areas,' he says." Becker's

Lastly, filing for bankruptcy, especially a pre-pack, may be desirable as well since selling assets in a 363 transaction can bring more buyers. 

"Hospitals may choose to employ this strategy of filing for bankruptcy as part of the transaction process when they have few alternatives, according to Mr. Beith. 'The basic financial implication of that is they are significantly upside down in terms of value versus their total outstanding indebtedness,' he says. 'Cleaning them up, so to speak, through bankruptcy process is an appropriate way for an acquisition to occur.'

Mr. Shields says identifying a partner before filing gives healthcare providers "a little bit of security" going into bankruptcy, although the strategy does have risk. 'They have a clear idea going into bankruptcy court that there will be someone on the other side to operate the hospital and take control of their assets,' he says. 'But there's risk in that. Once you go into bankruptcy, all bets are off. There's no guarantee that the bankruptcy judge is going to agree with your plans or that the partner will be there on the other side.' " Becker's

Sure there are risks associated with filing bankruptcy, but having a plan before going in seems absolutely essential in order to save the operation, jobs and ultimately lives of patients. 

For more on healthcare insolvencies, check out this podcast on the ABI website. It is from 2012, but many of the issues are still germane.