What to watch out for - Diagnosing a distressed hospital

Distressed healthcare situations have become much more prevalent for a number of reasons, many of which are frequently in the headlines in today’s political climate.

But putting politics aside, diagnosing a distressed hospital or healthcare facility is similar, in many ways, to any industry in trouble; identifying the early warnings and getting the right help early on may be the difference between being able to save a struggling hospital from closure or to protect one’s interests when doing business with a hospital or facing a shutdown and loss of any potential recovery. Just like the patient that waits too long to see the specialist, many financial problems can be solved with early detection and proactive steps.

News of distressed hospital and healthcare facilities has increased dramatically. Within the past twelve months, several high profile healthcare facilities have either filed for Chapter 11 bankruptcy protection or sought other relief, including:

1. Humble (Texas) Surgical Hospital filed for Chapter 11 protection in February 2017. The hospital filed its bankruptcy petition after a judge ordered it to pay Aetna $51.4 million after a seven-year court battle over the hospital's out-of-network charges. In its bankruptcy petition, Humble Surgical Hospital listed liabilities of at least $50 million and assets of at least $10 million.

2. Gardens Regional Hospital and Medical Center, a 137-bed hospital in Hawaiian Gardens, which served mostly low-income patients had faced financial troubles for years filed for Chapter 11 protection in 2016. Its bankruptcy filing reflected over $30 million in debt. Potential transactions fell through and in July 2016 an emergency motion to close the facility was filed. According to a report filed in the bankruptcy case by the Patient Care Ombudsman, Gardens Regional sent a request to suspend its license to the health facilities inspections division of the Los Angeles County Department of Health on January 31, 2017. The hospital officially closed on February 1, 2017.

3. Louisiana Heart Hospital and its affiliated medical group filed for Chapter 11 bankruptcy protection in January 2017 and the 134-bed hospital ultimately closed. The hospital had faced financial difficulties in recent years, as it struggled with shrinking reimbursements and rising operating costs.

4. North Texas Medical Center, which is owned by the Gainesville Hospital District, filed a Chapter 9 bankruptcy case in January 2017.

5. The public trust that operates Atoka (Okla.) County Medical Center filed a Chapter 9 bankruptcy case in January 2017. The critical access hospital owes approximately $16 million to creditors.

6. North Philadelphia Health System filed a Chapter 11 bankruptcy case in December 2016 after years of financial troubles. NPHS currently operates two facilities in Philadelphia: Girard Medical Center, a 168-bed psychiatric hospital, and Goldman Clinic, a substance abuse treatment center.

Additionally, numerous hospitals have seen their credit rating downgraded - a direct result of distressed financial conditions. Further, rural hospitals, including Critical Access Facilities (CAH), are closing at an alarming rate. The failure to maintain these types of facilities critically impacts the ability of patients seeking urgent care for life threatening situations where the difference between a ten-minute ride to the facility versus a thirty minute ride could mean the difference between life and death. Further, rural hospitals typically provide a significant source of employment and business trading opportunities for residents in these areas.

Healthcare facility professionals and corporate entities conducting business with such facilities need to be proactive in seeking solutions to maximize the prospects of a successful turnaround or bankruptcy process. In order to be proactive, warning signs need to be identified and dealt with promptly. Such warning signs may include:
a. Reduced reimbursements and impact on margins and the bottom line coupled with increasing costs;
b. Shifting community needs;
c. Impact of new or changing legislation and regulations;
d. Labor discord or employment issues; and
e. The pendency of significant litigation that could have a material adverse effect on the facility or its operations.

REDUCED REIMBURSEMENTS AND/OR CHANGE IN THE MIX OF REIMBURSEMENTS

Most hospitals or healthcare facilities provide medical services and seek to get paid for these services. The income statement of the facility may depend upon whether or not it receives governmental assistance, whether or not it is a “for profit” or “not for profit” facility and whether or not it may provide ancillary or additional services to generate different or “non-traditional” revenue streams. But generally speaking, most healthcare facilities generate collections 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 may not cover the full cost of services.

An Urban Institute report has estimated a 42.8% reduction in Medicaid reimbursement rates for physicians as a result of the readjustments to pre-2013. Doctors who still accept Medicare patients could see an average reduction of 21.2 percent in Medicare reimbursement rates, according the Department of Health and Human Services. Private Insurance companies have likewise cut reimbursements in an effort to become more profitable.

Healthcare facilities also need to be mindful of the recoupment and set-off risks that exist from both governmental and private insurance companies. Under many insurance procedures, payments are made based upon estimated services and rates and then an audit is conducted to assess whether or not there has been an underpayment or overpayment made by the insurer. If an overpayment was made, in many instances, particularly with respect to Medicare and Medicaid, the insurer may be able to recover against future payments any overpayments. Thus, an unexpected recoupment or set-off could present an immediate cash crunch that could cause the spiral into financial distress. Thus, proper plans and procedures to manage these procedures must be in place and proper contingencies need to be available should such an event occur.

Similarly, a healthcare facility that relies heavily on a single source Private Insurance Plan (i.e. the largest employer in a region) needs to be wary of local employment changes that could put such Private Insurance Plan at risk. If such a healthcare facility loses the ability to supplement their reimbursement mix and is left solely with Government Reimbursement, such reimbursement may not be enough and could put the facility at risk.

INCREASED COSTS

Likewise, healthcare facilities, like most other industries, 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 good 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, which would dramatically increase costs. Any such change could turn into a financial disaster very quickly.

CHANGES IN COMMUNITY NEEDS

Worldbank data provides that the typical community need for hospital beds is 2.90 beds per 1,000 persons. In today’s world of rapidly shifting population, a facility that once was adequate and profitable, based upon the community population, may find that a change in the population, coupled with reduced reimbursements and/or rising costs may suddenly not be able to survive. Assessments regarding community need must be at the forefront of any analysis regarding the viability of a healthcare facility. This would allow for changes in operations, perhaps including the addition of new revenue streams based upon changing population or demographics, to offset the loss of population. Such changes could be in the form of different testing capabilities or services that reflect the changed needs of the community. Again, the goal should always stand to be ahead of these changes to properly allow the healthcare facility to change, repurpose or cut costs as may be appropriate. These changes may also be impacted by whether or not the facility is “for profit” or “not for profit facility” that receives or may receive subsidies or tax revenue.

CHANGES IN REGULATIONS/SIGNIFICANT LITIGATION AND LABOR ISSUES

Healthcare facilities tend to be even more susceptible to changes in regulations that impact the bottom line (as described above with respect to reduced reimbursement rates). Similarly, a healthcare facility must always ensure that it has proper insurance coverage for the types of claims that may be brought against it. If insurance coverage is insufficient and a significant adverse litigation claim (whether it’s a malpractice claim or a contract claim) arises, the financial landscape of the facility may change overnight. If at all possible, service providers should inquire and be aware of the level of insurance coverage in place when doing business with a healthcare care facility and such facilities should always be monitoring their insurance needs to protect against catastrophic results.

As evidenced by the consistent rise in healthcare facility bankruptcies and insolvency situations, the risk of operating and doing business with these healthcare facilities will continue to be a challenge. 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 and it may be the difference between being financially viable or becoming another statistic.

Brian Rich is a partner at Berger Singerman law firm and a member of the firm’s Business Reorganization practice team. His practice includes representation of debtors, creditors' committees, bankruptcy Trustees and secured creditors in industries such as healthcare, hospitality & leisure and real estate. He services clients throughout the State of Florida and nationally, with a present focus on the Florida panhandle.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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