This report originally appeared in the October 2011 issue of DOTmed Business News

Many hospitals across the country are struggling to stay solvent in the face of today's economic challenges. For others though, the battle has been fought and lost with tough times leading to a final chapter—filing for bankruptcy.

“There are many reasons why hospitals are so hard hit, some of which are interrelated,” says Stephanie Wickouski, a partner at Bryan Cave LLP, a leading business and litigation firm where she counsels clients on all aspects of bankruptcy and insolvency.

Wickouski notes that some of the main reasons for hospital bankruptcies are because insurance reimbursement rates, especially from government Medicare and Medicaid, have decreased in recent years and third-party payment from private insurance companies has significant delays and is complicated to process.

“There are also a larger number of uninsured or under-insured patients, for which the hospital often does not get paid at all for their services,” says Wickouski. With the country’s high unemployment rates, many more Americans are seeking health care without health insurance coverage. When a sick or injured patient shows up to an emergency room, they aren’t turned away.

Hospitals also lose patients if they don’t have the state-of-the-art technology and equipment that other hospitals have—and equipment is expensive, adds Wickouski.

Add to that the number of high salaries and pensions hospitals must pay, and many are left unable to manage their debts and must seek refuge in Chapter 11 bankruptcy. But is this the only option?

“Federal bankruptcy law is often the only way to restructure debt when there are multiple creditors, such as vendors, employees, bondholders and the federal and state governments,” explains Wickouski.

It seems no region of the country is immune. Since last year, hospitals as small as the 34-bed Kentuckiana Medical Center in Clarksville, Ind., to Massachusetts’ 284-bed Quincy Medical Center have declared Chapter 11. In Southern California, Victor Valley Community Hospital filed last September claiming $20 million worth of debt, and Doctors’ Hospital of Slidell in New Orleans went bankrupt this February.

New Jersey and New York have been hit hard as well. Peninsula Hospital in Queens began bankruptcy proceedings in August, following the path of St. Vincent’s Hospital in New York and Hoboken University Hospital in New Jersey. St. Vincent’s and Hoboken’s bankruptcy filings have been mired in controversy and claims of fraud, however. News leaked that Hoboken University Hospital filed bankruptcy on August 1, naming 5,000 creditors at the same time its CEO received a $600,000 payout upon resigning.

St. Vincent’s Hospital is under investigation for fraud by New York’s District Attorney, who accused the hospital of sinking their finances to clear the way for sale of its site to a private developer, according to the New York Post.

However, Caroline Steinberg, vice president of Health Trends Analysis at the American Hospital Association (AHA), says the hospital bankruptcies have a lot to do with the large budget deficits saddling many states across the country, causing budget cuts in programs that can least stand the trimming.

“A lot of states are cutting Medicaid payment for providers at just the time the number of people in the Medicaid program is going up,” says Steinberg.

“While the AHA doesn’t rigorously track bankruptcies, you would expect to see more in states that have been harder hit by the economy, particularly manufacturing states such as Michigan,” she continues.

Steinberg also suggests that New Jersey and New York have been hard hit because hospitals in the area typically operate with thin profit margins so they didn’t have much of a buffer when the economy went south.

Experts also point to impending lawsuits as a chief cause of hospitals going bankrupt.

A prime example of this is what has happened at Gerald Champion Regional Medical Center in Alamogordo, N.M. The board of directors says lawsuits were to blame for the hospital filing for Chapter 11 in August.

The filing was done to protect the hospital’s ability to provide health care to the more than 70,000 patients the 99-bed acute care facility serves in the community, according to a hospital press release. Hospital officials said most of the lawsuits were filed between June and October 2010 relating to “procedures that have not been performed at the hospital for nearly three years, by physicians who no longer work at the hospital,” and all efforts to resolve the lawsuits have been unsuccessful.

“This was a difficult decision for the board, but Chapter 11 provides the hospital with a mechanism to resolve the lawsuits fairly and efficiently,” board chairman Norm Arnold said in the release. “We believe this is the most responsible way to manage this unanticipated threat to the hospital’s long-term viability so that we can fully focus on our complex mission of meeting the growing medical needs of our community.”

Hospital officials said that during the bankruptcy process, the more than 700 current employees at the hospital will continue to receive wages, salaries and benefits, and all vendors providing goods and services to the hospital after the filing will be paid in full.

And while patients served by Gerald Champion won’t see the doors of their hospitals closed, patients served by Queen’s Peninsula Hospital may not be as fortunate. The facility’s bankruptcy plans entail shutting its doors, leaving only one hospital to care for more than 100,000 residents in the area.

A community affected
“Unfortunately, when a hospital closes, it can have a dramatic impact on a community,” says AHA’s Steinberg. “Hospitals tend to be one of the largest employers in a community, and if you’re talking about a rural community it can be the only large employer and one of the few that offers a range of jobs for various skill levels and benefits.”

According to a June report released by the AHA, hospitals employed more than 5.4 million Americans in 2009 and overall supported one out of every nine jobs in the U.S. Behind restaurants, hospitals are the second largest source of private sector jobs.

What’s more, hospitals spend about $342 billion annually on goods and services from other businesses, such as laundry and food service companies, which creates additional economic value for the community. These ripple effects help make up the $2.2 trillion in economic activity that the AHA says hospitals bring to communities across the country.

Back from the brink
It's not all doom and gloom though. Filing for bankruptcy doesn’t always equal the end for hospitals. Some struggling hospitals have managed to use Chapter 11 bankruptcy as a way to rehabilitate themselves and come back in better financial shape.

“Hospitals often are able to operate in Chapter 11 successfully,” affirms Wickouski.

A successful rehabilitation took place at New York’s Auburn Memorial Hospital, which was portrayed in last October’s DOTmed Business News for managing a financial recovery after filing for Chapter 11 in April 2007.

“Four years later and we’re still in business, and business is better than ever,” John Baran, Auburn’s CFO told DOTmed.

In April 2007, when the hospital filed for bankruptcy, its largest liability was the approximately $20 million owed to pension plans and $4 million owed to trade vendors. Baran told employees then that while it was filing for Chapter 11, the hospital—the only one in the county—would not be closing and they would not lose their jobs.

In July 2008 the hospital reached an agreement with creditors, and the court officially discharged the hospital by November of that year. Generally, it takes a hospital 12 to 18 months to emerge from bankruptcy, Baran told DOTmed.

According to Wickouski, during bankruptcy proceedings, while a hospital’s finances may be in critical condition, the standards of patient care are still important and under scrutiny.

It turns out that the Federal Bankruptcy Code requires the appointment of a patient care ombudsman in every hospital case. That individual is responsible for monitoring the quality of care and reporting to the court, explains Wickouski.

The ombudsman is an independent professional, not an employee of the hospital, so he or she does not have the power to make changes if necessary.

“In my experience, however, most hospitals will correct any problems found once the ombudsman has brought them to the attention of the hospital, even before formal reports are made with the court,” says Wickouski. In most cases, the ombudsman continues in the role for the duration of the bankruptcy case.

A grim outlook?
At the AHA, Steinberg says they are hoping for government action to help the economy improve and avoid future hospital closings, especially those due to Medicaid cuts.

“Some of the actions that were taken in the first round of stimulus funding to states were a huge infusion of dollars that helped stave off some of the Medicaid cuts,” she says. “Of course now that money has expired and we’re seeing the effects of that.”

Medicaid accounted for 15.4 percent of state budgets in 2010, according to a report in the Wall Street Journal, and is an area where governors have almost universally proposed cuts. States no longer have funding help from the expired Stimulus Act of 2009.

An analysis released September 9 by the AHA and conducted by Tripp Umbach, a firm specializing in economic impact studies, paints a grim forecast for the future. If Congress fails to compromise on spending cuts, Medicare will be subject to a 2 percent cut, according to the report. The cut would amount to a projected loss of about $41 billion over the next 10 years for hospitals — and more than 194,000 jobs lost by 2021.