A Proactive Approach to Hospital Financial Health.

• Author: Coordes, Laura

INTRODUCTION

Magee General Hospital (Magee) is a nonprofit, 44-bed acute-care facility located between the cities of Jackson and Hattiesburg, Mississippi. (1) The third-largest employer in Simpson County, it provides essential care for elderly residents in the county who cannot drive to Jackson and for car accident victims on U.S. 49 South. (2) Magee declared bankruptcy in August of 2018 and emerged in May of 2020, having restructured its board of directors and created a plan to share staff with another hospital in Covington County, 20 miles to the south. (3) But thanks to COVID-19, Magee's troubles were far from over.

Pre-pandemic, elective care accounted for approximately two-thirds of Magee's revenue. (4) When the pandemic put a halt to elective care procedures, Magee therefore saw an immediate financial effect. Although it sought stimulus money from the federal government, it received the lowest amount of any acute-care facility in the state of Mississippi. (5) Once again, Magee hovered on the brink of financial distress. This financial distress, in turn, affected Magee's ability to provide care for its patients. As Magee's head physician stated, "There have been some days that you cross your fingers, and hope that nobody else declines." (6)

Magee's experiences are typical for many Southern rural hospitals, which tend to operate on razor-thin margins and face challenges such as uncompensated care costs, expensive equipment, and declining elective care visits. (7) Since 2014, five rural hospitals in Mississippi alone have shut down, and forty-one more--approximately 64% of the state's remaining rural hospitals--have been designated as vulnerable to closure by the Chartis Center for Rural Health. (8) The uncompensated care costs facing Mississippi's rural hospitals amount to hundreds of millions of dollars on an annual basis. (9) State lawmakers rejected an expansion of Medicaid, which would have helped to reduce this number. (10)

Financial problems are not unique to Mississippi or to rural hospitals. Many of America's urban hospitals are also vulnerable to severe financial distress. Wherever a hospital struggles financially, the effects of that struggle are felt most acutely by the poor and people of color (11)--those who have been hit hardest by COVID, (12) yet have the fewest places to go for care, because they represent the highest proportion of uninsured. (13)

In April 2020, Mississippi's rural hospitals received $317 million in CARES Act rural distribution funds, which helped those hospitals deal with losses of $450 million in fiscal year revenue due to uncompensated care and $81 million due to COVID-related expenses, such as increased need for personal protective equipment. (14) Unfortunately, Magee received none of this money. (15) The U.S. government considers Magee to be part of the Jackson metropolitan area, even though it's nearly an hour's drive from the city, making Magee ineligible for rural hospital funds. (16)

In spite of the tumultuous events of the previous months, Magee has a lifeline that some other rural hospitals in Mississippi do not. Recall that, in bankruptcy, it set up a partnership with another hospital, Covington County Hospital. (17) The cost savings stemming from this partnership allowed Magee to emerge from bankruptcy and helped keep it afloat during the early struggles associated with the COVID-19 pandemic. (18) By sharing administrative staff, both hospitals are able to keep costs low; in fact, Magee was even able to upgrade its facilities during the bankruptcy thanks to the cost savings. (19) This Article provides a snapshot of U.S. hospitals, illustrating the vast divide between "rich" and "poor" institutions. It asserts that COVID-19 has exacerbated this divide: wealthy hospitals have by and large managed to weather the storm, while many already-impoverished hospitals struggle with no real lifeline. U.S. policies aimed at helping hospitals overcome COVID-related challenges have had inconsistent and sometimes disparate effects.

As the U.S. continues to adapt to the challenges created by COVID-19, and as U.S. hospitals continue to face financial difficulties, it will be increasingly important to provide options for those hospitals, like Magee, that are too important to fail. A community hospital like Magee may be the only option for some people to get the healthcare they need. As Magee's CEO recently remarked, "Closing the hospital or losing the hospital in bankruptcy was never an option. The hospital represents too much to the community to fail, not just in terms of health care but also in terms of economic development. Plain and simple, failure is not an option." (20)

All the same, many of these "too-important-to-fail" hospitals are closing down anyway. Out of approximately 6,000 public and private hospitals across the country, 8% are at risk of closing, and a further 10% have been designated as "weak." (21) And hospital closures do not affect everyone equally: they tend to disproportionally impact racially segregated communities and African-American neighborhoods. (22) Put differently, when hospitals close down, vulnerable and minority communities often pay the price.

This Article overviews the benefits and pitfalls of the various remedies commonly used to assist a hospital in financial distress: bailout, bankruptcy, and other non-bankruptcy alternatives such as state receiverships. To help counteract the risk of hospital failure, it suggests looking at what some hospitals are doing well and attempting to be more proactive in the identification of at-risk hospitals and in the management of their financial distress. In doing so, the Article also looks to the practices used for systemically important financial institutions (SIFIs), those entities deemed "too big to fail." Although SIFIs differ from hospitals in many ways, at bottom, the failure of either a SIFI or a too-important-to-fail hospital would be catastrophic. The systemic impact of a SIFI failure has the potential to trigger a global financial crisis: the concern is that a SIFI failure would cause a chain reaction of failures, and an eventual economic collapse. The effects of a hospital failure are not quite as far-reaching, but they are just as devastating for the community impacted. The community's loss of access to care and jobs as a result of a hospital failure can leave an already struggling area impoverished.

SIFIs are required to make "living wills," detailed plans for how they would handle a financial crisis or liquidation. Drawing on this idea, this Article suggests that too-important-to-fail hospitals proactively develop their own version of "living wills": plans to manage financial crises and, when possible, to make operational changes, establish backups, and pare down costs. It highlights what some hospitals have done to shore up financial stability and argues that a proactive approach to dealing with financial distress is better than any of the widely available reactive strategies.

There is no silver bullet to resolving hospital financial distress. But by recognizing the inequality among hospitals--inequality that has been exacerbated by COVID-19 (23)--and by focusing on proactive ways to manage finances, regulators and policymakers can help mitigate the damage and resulting inequality that arises whenever a crisis strikes.

The Article proceeds as follows. Part I describes the precarious financial situation in which many hospitals find themselves and argues that failure is not an option for some of them. Part II then analyzes the existing, "reactive" options for a financially distressed hospital, concluding that, in many instances, the disadvantages of these options outweigh their benefits. Part II then examines a series of proactive measures hospitals can take--and in some cases, have taken--to mitigate the risk of financial harm and suggests that hospitals use the living will model to consider implementing those measures. Part III concludes by emphasizing the importance of creative thinking and a proactive approach to hospital financial health.

1. A CHECK-UP ON HOSPITAL HEALTH

   Many U.S. hospitals seem set up to fail: they operate on extremely thin margins, face a high risk of nonpayment for their services, and--with COVID-19--often must deal with increasing expenses. Even the (many) hospitals with large investment portfolios can struggle when the markets are turbulent, as they were in the early months of the pandemic. (24) This Part provides an overview of hospital financial health, with a focus on a particular type of hospital: one that is too important to fail.

   1. HOSPITALS ON A FINANCIAL PRECIPICE

      The media is full of stories about U.S. hospitals and their precarious financial condition. (25) Many hospitals are run on very tight margins, with just days or a few weeks of cash on hand. In recent years, private equity firms have bought up portions of the healthcare sector; although this may seem at first blush to create stability, some have questioned whether this ownership structure leaves facilities "hamstrung with debt.'" (26) In May of 2020, almost half of U.S. hospitals had less than one year of cash on hand, up from about 20% pre-pandemic. (27)

      At a time when access to healthcare is more critical than ever, the COVID-19 global pandemic has taken a severe toll on some hospitals. Ah though it may seem surprising that hospitals would be negatively impacted by a global health crisis, the pandemic has actually pushed some hospitals further into the red. Healthcare providers that were already in dire financial straits faced higher demand for some services, higher costs due to the increased need for personal protective equipment (PPE), and, in most parts of the country, an inability to provide revenue-generating elective procedures. (28) As a result of the pandemic, over 200 hospitals, about 3% of hospitals in the country, have furloughed workers. (29) In April of 2020, Fitch Ratings...