Hospitals still under stress despite recovering economy

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 indicate.

It's not only Medicare pay cuts pushing providers into bankruptcy, but also a combination of forces that include 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 providers in distress based on Chapter 11 filings for healthcare services firms with more than $1 million in assets. The analysis included 83 organizations.

“We did not see the Affordable Care Act mentioned very much,” Guy said. “It was often issues that snuck up on companies or a convergence of factors.”

The vast majority of filings—or 77.8%—cited more than one cause for organizational distress, with more than a quarter of filings citing four reasons. For instance, three-quarters of filings that cite tort litigation also noted the high cost of liability or malpractice insurance. And most of the healthcare services companies that blamed reimbursement changes for their stress also cited competition and the rapidly changing healthcare environment as contributing 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, signs point to an operating environment getting more challenging rather than improving. There were seven groups of bankruptcy filings involving hospitals in 2014, compared with at least nine filed in the first eight months of this year.

While the overall economy can affect 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.”

As revenue is squeezed, healthcare cost structures also create challenges, said Daniel Bleck, a bankruptcy attorney at Mintz Levin. Salary and benefit costs continue to rise, particularly for rural providers that need to offer attractive compensation packages to draw physicians. And capital expenditures are being deferred.

“It's a similar story we've heard in the past,” Bleck said. “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, Bleck said. “And they're not doing that effectively.”

They're also facing greater competition from traditional and nontraditional providers, particularly in ambulatory settings, and are struggling to build or buy the necessary infrastructure. Health systems are growing fast, but bad mergers and overexpansion have created their own challenges, appearing as a factor in 20.5% of Chapter 11 filings.

Still, many providers facing 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.