How To Turn Failing Hospitals Around

In the first few months of 2014, Becker’s Hospital Review reported that seven acute care hospitals and health systems filed for bankruptcy protection or announced their closure. This followed 18 acute care hospitals shutting their doors and numerous other hospitals being sold or terminating individual services, units or departments as a result of financial distress in 2013.

While there have always been hospitals that are financially troubled, the requirements of the Affordable Care Act, the need for significant capital investments in IT and other areas, and the pressures of declining reimbursement are likely to push many hospitals to the brink of insolvency or at least inadequacy.  This can have a devastating effect not only on the hospitals themselves but on the communities they serve and the reliance the local citizenry has on these institutions.

A historical review of the sales of distressed hospitals suggests some underlying common reasons for their plight, including:

• An insufficient number of physicians or the lack of an adequate hospital alignment strategy
• Inadequate management of Medicare patients including inappropriately long lengths of stay
• Too few commercial insurance patients or unfavorable payer contracts
• Too little non-operating revenue, such as would come from philanthropy or investment income
• High amounts of charity care or bad debt
• A powerful competitor that increasingly gains market share

Despite the fact that a common survival strategy (and often the first tactic applied) has been to eliminate unnecessary expenses, recent history has shown that very few hospitals are distressed because of their expense structure.   More frequently, distressed hospitals can trace their situation to inadequate revenue as a result of one or more of the factors noted above.

Turnaround is all about diagnosing a distressed situation and formulating and implementing a strategy built on specific corrective actions.  And while each situation carries with it its own imperatives, there are some overriding options to consider.

For freestanding hospitals at this crossroad, it may be time to look for partnership opportunities and to ask themselves “What do I need to remain viable and who can best provide it?” But affiliation is a two-way street, so it is equally important to look from the other perspective and ask “What do we have of value to offer a potential partner or system?” Perhaps you have excess capacity that would be attractive to a system that already has an overcrowded presence in your market. Perhaps your physical location is attractive to a system needing to fill a gap in its geographic coverage. Perhaps you have a brand with strong local equity.  Or perhaps you have programs, services, physician relationships, and technologies that a system would like to add to its portfolio. When considering alignment, it makes sense to play to your strength.

For hospitals already aligned but struggling, the answer may be found in considering how best to repurpose the facility in ways that build a sustainable business model for the future. Options may include converting excess acute care capacity to outpatient services, specialty care or other models of care delivery such as rehabilitation, long term care or alternative medicine.  An emergency department can be transformed into an urgent care center, existing operating rooms can be used for outpatient surgical centers and an inpatient floor is a natural fit for a sub-acute care facility.  The new use can save the facility, save jobs and respond to community need.

Given the tremendous pressures and challenges facing hospitals today, it is time for hospital leadership  – starting with their boards of directors who have a vital role to play in this process -- to candidly assess their long-term sustainability and options relative to market position, physician relationships, financial footing, payer mix and product offerings. The number of distressed hospitals in America is frightening, and attention must be paid.

Phil Dalton is the chief executive officer of MDS Consulting, a Torrance-based hospital and medical group consulting firm.