Failure to Acknowledge and Address Poor Financial Performance Cited as No. 1 Indicator of Distressed Hospitals in New Financing the Future II Report

During an era of slim operating margins and high performance pressures, health systems are facing a growing financial crisis. In fact, New York recently formed its own “hospital closing commission” in response to the closure of 12 hospitals within a 27-month period. To avert more severe financial problems and begin the road to recovery, hospital leadership must be able to recognize the five most frequent indicators of financial distress:

• Board and senior management acceptance of poor financial performance
• Erosion of profitable payer mix
• Poor physician relations
• Slipping market share even in growth markets
• A liquidity squeeze, such as decreasing cash reserves and days cash on hand

These characteristics of distressed hospitals and tips on overcoming such vulnerabilities are outlined in Strategies for Financially Distressed Hospitals, the fifth installment of the Financing the Future II series, from the Healthcare Financial Management Association (HFMA), GE Healthcare Financial Services and Kaufman, Hall & Associates, Inc.

“Some healthcare organizations may be headed toward irreparable financial crises. To overcome this threat, they must take a hard look at their existing finances and identify potential areas of weakness,” said Richard L. Clarke, DHA, FHFMA, President and CEO of HFMA.

A review by the Department of Health and Human Services’ Office of the Inspector General between 1990 and 2000 revealed three top characteristics among the most vulnerable hospitals:

• Hospitals that closed were generally smaller and treated fewer patients than their peers nationally.
• Hospital closures generally resulted from business-related decisions or a low number of patients. Competition was also a significant factor in urban hospital closures.
• Following a closure, alternative forms of healthcare were often available within the community.

“Financially distressed organizations must face the facts, acknowledge the scope of problems and obtain expert and comprehensive guidance to achieve performance improvement across all dimensions – strategic, clinical, operational and financial,” said Jeffrey A. Malehorn, President and CEO of GE Healthcare Financial Services. “Quick fixes for incidental problems are not adequate. Concrete steps must be taken to ensure sound leadership and accountability.”

Successful turnarounds of vulnerable facilities require an intense commitment to leadership, resources and well developed, executed and monitored financial plans. Two examples of organizations that regained competitive market and financial performance through comprehensive turnaround initiatives cited within the report are:

• Crouse Hospital, a 556-bed facility in Syracuse, NY, filed for bankruptcy protection in 2001. After implementing a strategic financial process, the facility emerged as a financially viable, independent hospital in 2003.
• Kaleida Health, a five-hospital health system in Buffalo, NY, experienced turmoil after a full-asset merger in 1997 that created a gap in system accountability. By implementing several financial turnaround strategies and increasing accountability the health system met its budget in 2002 and has continued to strengthen its balance sheet each year.

“When hospitals are not meeting targets, it is critical to intervene and develop a timely response to address underlying issues,” said Kenneth Kaufman, Managing Partner at Kaufman Hall. “Healthcare executives can take heart in the knowledge that identifying the warning signs of distress early can often eliminate the need for extreme efforts.”