Healthcare providers have gotten some balance sheet relief thanks to a greater number of paying patients over the past couple of years. But bankruptcy filings suggest the industry has recovered more slowly than the improving economy would suggest.
It's not the Affordable Care Act by itself that's pushing healthcare providers into bankruptcy, but a combination of forces including litigation, payment delays and even bad merger agreements.
“In the general U.S. economy, distress has dropped off 60% to 65%,” said Bobby Guy, a Nashville-based healthcare attorney at law firm Polsinelli. “In healthcare, it has gone up.”
Polsinelli conducted an analysis of healthcare providers in distress, using Chapter 11 filings for healthcare services firms with more than $1 million in assets. The analysis included 83 organizations.
The firm expected to see reimbursement and delivery system changes as the top reasons for bankruptcy, but was surprised when tort litigation topped the list, which is mentioned in 24.1% of filings. Payment delays came in second and were cited in 21.7% of filings.
“We did not see the Affordable Care Act being mentioned very much,” Guy said. “It was often issues that snuck up on companies or a convergence of factors.”
The larger-than-expected number of tort litigation-related filings was driven by a group of cases involving skilled-nursing providers in California, Guy said. Still, the causes providers cited for their Chapter 11 filings remained fairly consistent, clustering around eight reasons.
The ranking “might change year on year but we think it's reasonably representative of the issues that companies are facing right now,” Guy said.
Moreover, the vast majority of filings, or 77.8%, cited more than one cause for distress. More than a quarter of filings cited four reasons. For instance, three-quarters of filings that cited tort litigation also pointed to the high cost of liability or malpractice insurance.
And most of the healthcare services companies that blamed reimbursement changes also cited competition and the rapidly changing healthcare environment as factors.
About a third of Chapter 11 filings were from the South, from Virginia to Texas, while another 26.5% were from Arizona, California, Colorado, Nevada, New Mexico and Utah.
For hospitals in particular, there are signs that the operating environment is getting more challenging, rather than improving. There were seven groups of filings involving hospitals in 2014, compared to at least nine in the first eight months of this year, Guy said.
While the overall economy can have an effect on hospitals, it's not the main driver of a hospital's financial health, said Mark Claster, a partner at Carl Marks Advisors, a restructuring and reorganization firm.
“Reimbursement rates have compressed, and they've compressed dramatically,” he said. “There's a ripple effect. You don't have enough capital to expand. Hospitals have a lot of debt they've taken on to pay for capital projects.”
Even as revenue is being squeezed, the cost structure continues to create challenges for providers, said Daniel Bleck, a bankruptcy attorney at Mintz Levin. Salary and benefit costs continue to rise, particularly for rural providers that need to put together attractive compensation packages to attract physicians. And capital expenditures are being deferred.
“Generally what we're seeing is inadequate reimbursement rates from the payers,” Bleck said. “It's a similar story we've heard in the past … decreasing inpatient volume (and) pressure on wages.”
Hospitals also need to do a better job of managing point-of-service collections as patients shoulder more cost-sharing under high-deductible plans. “And they're not doing that effectively,” Bleck said.
Moreover, hospitals are facing greater competition from both traditional and nontraditional providers, particularly in ambulatory settings, and are struggling to build or buy the necessary infrastructure.
Healthcare providers are growing fast, but bad mergers and overexpansion can create their own challenges, appearing as a factor in 20.5% of Chapter 11 filings.
One organization in Polsinelli's analysis was forced to file for bankruptcy after running out of money on a construction project. “There's a warning story of the dangers of expanding too fast,” Guy said. “It was eye-opening to see how construction delays could cause an entire business to fail.”
Still, many providers facing the prospect of bankruptcy see a merger or takeover as their best option, especially in a seller's market.
“If you're out there alone, and you haven't taken steps to relieve those issues, then you're in trouble,” Claster said.