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Advice for struggling hospitals: Use financial distress forecasting to avoid closing down

Understanding the root causes of financial hardship enables hospital executives to best pick which areas to improve first.

Jeff Lagasse, Associate Editor

It's a tough time to be a hospital. Competition in certain markets is through the roof, reimbursement models are switching to a value-based framework, and if you're a rural hospital, chances are your patient volumes are down. But a struggling hospital can avoid shutting its doors by understanding the causes of its financial distress. 

About 80 rural hospitals closed from 2010 to 2016, according to a recent analysis, and some of the key factors behind this are a high rate of uninsured patients, and a payer mix heavy on public insurers with lower claims reimbursement rates. More patients are seeking care outside rural areas, which isn't helping, and many areas see a dearth of employer-sponsored health coverage due to lower employment rates. Many markets are also besieged by a shortage of primary care providers, and tighter payer-negotiated reimbursement rates.

All of which make survival that much more complicated. But in a new study researchers from the University of Texas Health Center at Houston examined more than 300 acute care hospitals in Texas from 2012 to 2015 and calculated an Altman z-score for each of them. A z-score can identify financially struggling facilities by creating a composite score based on profitability, financial leverage, liquidity and capital structure.

In 2012, 14.5 percent of those facilities were financially distressed. In 2015, 16.1 of them were. Smaller hospitals with fewer services were more susceptible to financial hardship, and were more likely to be flirting with bankruptcy.

That's where z-scores came back into the picture. The researchers recommended a comprehensive composite score -- if not the z-score exactly, then something similar -- to grab a big-picture view of the hospital's finances, integrating those things like liquidity and capital structure. This, they said, is preferable to looking at more granular metrics like days cash on hand and net income.

By tracking it monthly, hospitals are able to see where they're trending, how close they are to bankruptcy conditions or whether they're improving the overall financial picture. It allows a facility to know where to focus its efforts. And it also helps to compare yourself against other hospitals, which can be achieved by looking at data from hospitals' Medicare annual cost reports.

A good financial turnaround plan also factors in revenue cycle and expense management as potential avenues for improving solvency. Looking at workforce measures, such as the ratio of full-time equivalent employees to occupied beds, can also be a valuable measure, as it helps hospitals determine whether their staffing levels are appropriate.

With that information in hand, hospitals can develop financial turnaround plans specific to their circumstances, researchers said. 

Depending on the situation, a hospital may want to develop referral networks, expand into new markets, increase their patient volumes or foster partnerships with medical schools.

Twitter: @JELagasse
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