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Armchair Finance

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Feast or Famine

If you run a hospital, your financial situation is either black or red. You're likely either doing quite well or nearing the brink of disaster. That's the conclusion from an analysis of financial metrics of the nation's hospitals by the Alvarez & Marsal Healthcare Industry Group—a financial restructuring and turnaround firm that has helped HealthSouth and New York's St. Vincent Medical Centers, most famously, emerge from bankruptcy. The study, which gathered hospital data on expenses and net revenue, among other important financial metrics, shows that more than half of the hospitals in this country are either now technically insolvent or at risk of insolvency.

The study, which used financial information for the 2005 and 2006 fiscal years for each short-term acute-care hospital with more than 25 beds, eliminated hospitals with missing data, which reduced the final sample from 4,510 to 3,861. As one digs deeper into the study, the findings become even more troubling. If not the best of times for hospitals financially, 2005 and 2006 are certainly widely considered favorable as the price of capital fell to historic lows. Still, of the hospitals for which A&M did have complete data, here are the sobering conclusions:

  • More than 2,000 of the nation's 4,900 hospitals do not make a profit treating patients and must rely on alternate sources of funding.
  • The majority of potentially insolvent hospitals are in urban areas.
  • The lack of profit- and performance-based incentives in most hospitals prevents the industry from attracting certain management talent.

It's not a leap to guess that the strongest hospitals are either academic medical centers or part of a nonprofit corporate group that is able to spread risk among several hospitals and has a strong contingent of off-campus outpatient facilities. It's clear that the hospitals struggling most are not affiliated with a corporate group and depend on inpatient revenues. Perhaps the most easily correctable challenge that one can draw from this study is the problem with management. The fact that there's mismanagement going on at many of these facilities is indisputable, even though much of the data for that assertion is anecdotal.

The C's-for-hire at A&M can tell you that. I've heard plenty of management horror stories from interim CEOs and CFOs from A&M and other turnaround firms, but there are systemic problems, as well. It's clear that many hospitals, especially of the nonprofit, standalone variety, can't make the necessary 4% minimum margin they need for capital reinvestment on inpatient revenues alone. They depend on other sources of income, like philanthropy and government subsidies, to survive. Given the instability of those funding sources, perhaps those hospitals should strongly consider affiliations or outright mergers. The good times won't go on forever.

Philip Betbeze

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