Hospital Bankruptcies Are On the Rise, Hitting Rural Areas Hard

November 08, 2018 - The healthcare industry experience more than 20 hospital bankruptcies since 2016, and about three-quarters of the distressed hospitals operated in rural areas, law firm Polsinelli recently reported.

The Am Law 100 firm tracks Chapter 11 bankruptcy filings by entities with assets greater than $1 million and releases a quarterly report. The quarterly reports use Chapter 11 filing data as a way to measure the financial distress in the overall US economy, as well as the real estate and healthcare sectors.

The most recent quarterly report shows that the healthcare industry is experiencing significant financial distress as the number of hospital bankruptcy filings continues to outpace the general economy.

The Q3 2018 report showed that the overall economy and real estate industry have remained stable over the last several quarters. The Chapter 11 Distress Research Index was 47.17 points in the third quarter of 2018, down two points since the last quarter.

Overall, Chapter 11 filings have been decreasing. The Chapter 11 Distress Research Index fell the last two quarters, and the index dropped about 53 percent compared to the benchmark period of the last quarter of 2010, researchers pointed out.

Similarly, the Real Estate Distress Research Index was down one point since the previous quarter, totaling 31.67 points by the third quarter of 2018. The real estate index has also decreased the last two quarters, and it dropped approximately 68 percent compared to the benchmark period.

Hospitals, however, are not seeing their financial standings improve, according to the most recent Health Care Services Distress Research Index.

The healthcare-specific index reached a whopping 405 points in the third quarter of 2018. And the index increased 65 points since the previous quarter.

Compared to the same period a year ago, the index jumped approximately 82 points, and compared to the benchmark period, the index is up 305 percent.

Researchers noted that the Health Care Services Distress Research Index has hit record or near-record heights for the last eight quarters.

The southeastern region of the country has been hit the hardest with hospital bankruptcies and closures in Q3 2018, the report added. Hospitals from Texas, Florida, and other southeastern states represented almost 82 percent of the total index filings from the third quarter of 2018.

The number of hospital bankruptcy filings in the southeastern states is also up 50.23 percent compared to the benchmark period.

Increased competition, payer pressure, and overexpansion may be to blame for the uptick in healthcare finance distress, the report indicated.

For example, Houston-based Neighbors Legacy Holdings filed for Chapter 11 bankruptcy in 2018 despite operating over 30 freestanding emergency centers throughout Texas. The healthcare organization attributed their bankruptcy filing to a boost in competition, as well as overexpansion.

Competition, lower reimbursement rates, healthcare mergers and acquisitions, and other contributors to healthcare financial distress are unlikely to decrease in the near future. Recent research already predicts hospital bankruptcies and closures to continue in the coming years.

But hospitals can prevent financial distress, Professor of Healthcare Management and Informatics at the University of Texas Health Science Center at Houston James Langabeer II, PhD, recently explained to RevCycleIntelligence.com.

Quantifying a hospital’s financial distress level is key to changing the current hospital bankruptcy and closure trend, he said. Hospitals should calculate their Z-scores, which are a weighted composite score of four ratios: financial leverage, profitability, liquidity, and capital structure.

The ratios can be found on hospital balance sheets and income statements, he added.

Hospitals with scores less than 1.8 points are at immediate risk of bankruptcy, while scores between 1.81 and 3 points are at risk of financial distress. Z-scores higher than 3 points indicate good financial standing.

Hospital CFOs should then use their financial distress scores to inform a turnaround strategy, Langabeer stressed.

“Fundamentally, CFOs need to get involved with figuring out how to manage their business differently. How do we restructure our service lines? How do we partner with different facilities? How do we get better referral networks from rural, urban, or whatever the opposite of where you're sitting is,” he posited?

“We’re finding CFOs needs to become much more strategic, and not just on the financial side, but also on the business side of things.”

Improving revenue mix by offering additional outpatient services, treating more high-acuity patients, or merging with a large healthcare organization may help hospitals overcome financial distress, he added. But the change must be significant enough to really transform how the hospital does business.

“We need to be doing something different because the trend is changing. We have more distressed hospitals today than we did four years ago,” he said.