Meager operating margins and rampant competition in some markets continue to eat away at the hospital industry, which is experiencing closures at a rate that matches last year's brisk pace. The shutdowns are occurring despite reports of higher demand for acute-care services.
Research by a private consulting firm and Modern Healthcare shows that at least 23 hospitals either have announced plans this year to end inpatient acute-care services or have shut their doors since Jan. 1. Forty-four hospitals closed during all of 2000, according to a list compiled by Modern Healthcare and published earlier this year (Jan. 8, p. 52).
Meanwhile, recently released government numbers show that hospital closures reached a 10-year high in 1999, with 64 hospitals ending acute-care services in that year (See chart).
The majority of recent closures affect urban hospitals, mainly in overbedded markets of the Midwest and Northeast such as Ohio and New Jersey. The closures have eliminated about 4,200 staffed beds and more than 13,000 employees, although some beds and employees were shifted to other facilities, according to Cleveland-based Dynamis Healthcare Advisors, which released its midyear hospital closure report exclusively to Modern Healthcare.
Dynamis tracked 24 closures or announced closures so far this year. That compares with 20 reported midway through 2000, according to Dynamis.
The firm used a broad definition of closure. Two hospitals on the list announced closures but have since said they reversed those plans under new ownership. The list also includes Cleveland Clinic Hospital in Fort Lauderdale, Fla., which is relocating to a new building. The list did not include two closures that were reported by Modern Healthcare.
Still, the numbers indicate significant closure activity, even as hospitals in many markets are struggling to meet increasing inpatient demand. In many cases, closures reflect efforts by healthcare systems to reduce overhead by consolidating services.
"I think the industry is continuing to get pressure from the (bond) underwriters to take nonperforming assets and get them closed or sold," said Scott Keller, a principal at Dynamis.
Overall, closures have a mixed impact on the industry, said Bruce Gordon, a senior vice president at Moody's Investors Service.
Closures can benefit other hospitals in the market by increasing their volumes. For example, Catholic Healthcare Partners' decision to close 108 bed-Mercy Hospital in Hamilton, Ohio, will allow the system to consolidate services at its other hospital in that market, Gordon said. In the long run, the move will benefit the system's credit profile, he said.
But unlike in 1999, when the average occupancy of closed hospitals was less than 40%, according to HHS, closures increasingly hit hospitals with significant volume, and the remaining players sometimes cannot pick up the slack. For example, hospitals in Rochester, N.Y., may have difficulty caring for patients who otherwise would have gone to 269-bed Genesee Hospital, owned by ViaHealth. He said hospitals in the market will face higher costs in the short term because they will have to pay a premium for nursing staff.
Meanwhile, hospitals in Washington could face higher indigent costs as a result of the closure of D.C. General Hospital, a 250-bed public facility, in June. "From a financial standpoint, that's not a plus for those remaining hospitals," Gordon said.
In addition, Gordon believes reports of closures, as well as bankruptcies and defaults, have scared away some potential bond investors, which drives up borrowing costs because of the perceived risk of the industry.