Hospital bankruptcies could loom on the horizon, analysts warn

Recent regulatory changes and the health care industry's broader shift to value-based care are putting acute financial stress on hospitals and other health care companies, leading to a new wave of bankruptcies and restructurings, according to industry observers.  

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Bankruptcies rise, even as some hospitals prosper

While bankruptcy filings across the economy overall have fallen since 2010, the health care industry has experienced a more-than-threefold increase in bankruptcy filings over the last year, according to Bloomberg. Health care bankruptcies account for 7.25% of all U.S. bankruptcy filings submitted this year—up from the 5.25% such filings since 1997, Bloomberg reports.

And while figures from the Medicare Payment Advisory Commission (MedPAC) suggest hospitals on the whole are doing well—with total hospital all-payer margins hitting 6.8% in 2015, the highest level in three decades—hospital officials point out that the numbers are based on aggregate data, Modern Healthcare reports. As such, hospitals in populous, growing areas such as New York or Atlanta may be doing well—even as hospitals in rural areas struggle to make ends meet, according to Modern Healthcare.

What's driving the trend

According to David Neier, a partner in the New York office of law firm Winston & Strawn LLC, health care companies are facing a "perfect storm" of financial stressors, including regulatory changes, technological advances, and the rise of urgent care facilities.

Hospital executives said federal mandates to implement new policies and launch health information technology—coupled with cuts to Medicare's payments to providers and disproportionate-share hospitals (DSH)—have created a growing chasm between Medicare reimbursement and the cost of treating Medicare beneficiaries.

According to the American Hospital Association (AHA), CMS in 2015 paid 90 cents for every dollar hospitals spent on Medicaid beneficiaries and 88 cents per dollar for Medicare beneficiaries—leading to a shortfall of $41.6 billion for Medicare providers and $16.2 billion for Medicaid providers.

The DSH cuts present a particular threat to hospitals, according to Neier. He said Congress' decision to let those cuts take effect this year, after delaying them several times, could "single-handedly throw hospitals into immediate financial distress—many operate on less than one day's cash."

Stakeholders explained that the DSH cuts, implemented under the Affordable Care Act (ACA), were premised on the assumption that coverage expansions under the ACA would diminish hospitals' need for DSH payments. But some states have chosen not to expand Medicaid under the ACA, leading providers in those states in a financial bind.

Further, while hospitals could previously depend on growing reimbursement from commercial payers, insurance companies now face tight margins too, Modern Healthcare reports.

Many hospitals can't count on an increase in employers offering commercial coverage either, according to David Ramsey, CEO of Charleston Area Medical Center, who cited a flat market in his own rural area.

And even Americans who do have commercial coverage increasingly are enrolled in high-deductible health plans, according to CDC data—a trend that's resulted in more bad debt for health care providers, Bloomberg reports.

The challenge of value-based payments

But according to Modern Healthcare, the effort to shift Medicare from a fee-for-service to a value-based payment model presents "perhaps the most serious challenge" for providers already facing "low Medicare margins."

For Catholic Health Initiatives, the shift toward value-based care has meant lower margins on Medicare beneficiaries, according to system President and CFO Dean Swindle. Separately, John Bishop, CEO of the three MemorialCare Health System hospitals, said of the shift, "Keeping people out of the hospital really is the right thing for our community, but it has reduced our fee-for-service volume."

AHA estimates that community hospitals spend an average of $7.6 million annually on administrative costs related to meeting federal mandates for quality reporting, record-keeping, and meaningful use compliance. But despite these investments, a 2016 study by McKesson found that only about one-quarter of hospitals were meeting goals to reduce costs under new payment models, and only 30% were meeting care coordination goals.

How hospitals are responding

In response to the financial challenges, hospitals are shutting down certain programs and laying off employees, Modern Healthcare reports.

For instance, Charleston Area Medical Center intends to cut 300 jobs by the end of the year and eventually shutter a wellness program, a pharmacy, and a pulmonary rehabilitation program.

Separately, CHI said its struggles with low Medicare margins contributed to 459 layoffs at one facility and the decision not to fill an additional 161 vacant positions. The system also has cut its investments in value-based care and population health by between 35% and 40%, redirecting funding "to things like patient experience," Swindle said.

Hospital leaders are calling on Congress to take action, such as by overhauling Medicare's recovery audit contractor program—which has erroneously flagged a substantial number of claims as incorrect, according to stakeholders.

Hospital leaders also are urging lawmakers to keep in place the ACA's individual mandate, which helps ensure that healthy individuals purchase health insurance—though the Senate-approved tax reform bill would repeal the provision.

"No matter what, we continue to figure out how to take care of people, but you get to the point where there just aren't the resources," Linden said. "I do fear for the future" (Dickson, Modern Healthcare, 11/25; Kary et al., Bloomberg, 11/27).

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