"Hospital Insolvency: The Looming Crisis," a recent study by the Healthcare Industry Group of global professionals services firm Alvarez & Marsal, shows that more than half of U.S. hospitals are now technically insolvent or in danger of becoming insolvent. On that point, Matthew Marcos, Senior Director of the Alvarez & Marsal Healthcare Industry Group, states:
For years, incremental change has been the accepted path to improved hospital performance. We believe hospital boards and management need to focus on restructuring operations and retooling capital structure or risk irrelevance.
The major findings of the study include the following:
- More than 2,000 of the United States' 4,900 acute-care hospitals are not making a profit treating patients and must rely on alternate and generally unstable sources of funding, such as governmental subsidies and philanthropic contributions.
- Approximately 1,000 of the "profitable" hospitals generate insufficient cash flow to fund essential nondiscretionary capital expenses necessary to ensure regulatory compliance and competitiveness.
- Hospitals' capital expenses are underfunded by $10-20 billion, because capital funds have been diverted to operations.
- The majority of potentially insolvent hospitals are located in urban, and not rural, areas.
- A lack of profit- and performance-based incentives prevents the health care industry from attracting the quality of management talent found in other industries.
- In many cases, the complexities of operating a hospital or hospital system overwhelm their management and the boards that oversee them.
Alvarez & Marsal conclude that, absent the willingness of hospital boards and management to quickly abandon the traditional "band-aid" approach to problem-solving and adopt more aggressive measures to shore up their financial and operational foundations, the very survival of those institutions will be at stake. On that point, Matthew Marcos adds:
The gap between the strong and the weak will continue to grow as the strong can attract the best physicians and acquire the newest equipment, while the weak do not generate sufficient profitability to sustain their missions.
The need for hospital boards and management to start "thinking outside the box" is especially important in light of the plans by most of the hospitals responding to a recent survey conducted by Waller Lansden Dortch & Davis, LLP, "Hospital Investments in Competitiveness: Financing Options," which is also featured in this newsletter, to make significant capital expenditures in facilities, technology and/or equipment in the near future.
The April 22, 2008, press release concerning "Hospital Insolvency:The Looming Crisis," as well as the study itself, can be found at Alvarez & Marsal's Web site, www.alvarezandmarsal.com.