Doing a full financial assessment is key to forecasting financial distress but there’s more to it than looking at cash flow ratios and profitability.

Hospitals continue to face significant financial pressures thanks to market changes, healthcare reform and competition — and that means finance and operations executives need to act proactively in analyzing whether their institutions are in distress and, if so, form strategies to improve conditions that turn around their performance.

Financial distress is the term used to describe organizations struggling to pay creditors, investors and employees and that report sustained periods of losses that might evolve into bankruptcy and ultimate closure.

Rural hospitals are the most impacted, with 80 closures between 2010 and 2015. Two rural hospitals in Arizona just closed, in fact, a reality that shows just how dire the situation can become.

“Understanding the extent and possible predictors of hospitals in financial distress helps to understand subsequent reports of closures. Closures could impact both access and quality of care for patients in that region,” according to new research from the school of healthcare management at the University of Texas Health Science Center in Houston.

Researchers focused their analysis on Texas, zeroing in on 310 acute care hospitals with complete financial data, which was necessary for the study. In terms of ownership, the group broke down to about 49 percent investor-owned hospitals, 33 percent voluntary nonprofit and  19 percent government owned. Also, 76.5 percent were urban hospitals while roughly 24 percent were rural. Eighty percent were nonteaching hospitals while 20 percent were teaching facilities.

Overall, the number of Texas hospitals in moderate or severe financial distress has risen from 14.5 percent in 2012 to 16.1 percent in 2015. Researchers found that these hospitals were generally smaller, had lower patient acuity, and less outpatient revenue mix than those in good financial health. That distress can lead to bankruptcy filing and eventual closure, so predicting it is important for hospital administrators and policy makers.

What’s more, while the number of closures right now is “relatively small” the potential for future closure is very high, researchers said.

“Our evidence of future distress suggests that dozens of additional bankruptcies are possible, which could translate to even more closures or consolidation of services into larger provider systems that could also adversely impact access to care,” the report said. “Obviously, the more important management response would be to avoid bankruptcy conditions in the first place.”

The researchers prescribed diversification, growth and improving the revenue mix toward greater outpatient services and they noted that higher patient acuity can be achieved at least in part through broadening to include more complex service lines.

They also proposed affiliating with a health system, since most of the distressed hospitals in the sample were smaller facilities and only 39 percent in the whole sample were affiliated. These strategies are especially helpful for rural hospitals, whose locations can sometimes put them at a disadvantage.

Before hospitals leaders decide on a course of action, they should do a full financial assessment to gauge their overall condition. Researcher cautioned against relying only on figures such as typical profitability or cash flow ratios, as they don’t always paint a complete picture of a hospital’s financial health and therefore may not accurately predict declining financial health. Distressed hospitals should consider strategies that will help them adapt, including the possible elimination of unprofitable service lines.

Researchers also said lawmakers must consider how policy changes or new rules will affect the smaller fragile rural hospitals that are vital to ensuring access to care in their region.

“Policy makers should understand the relative prevalence of distress and ensure that reimbursement and other health policies do not create additional undue burden on these smaller, more rural, acute care facilities. Efforts at further health care reform should take this into consideration as well,” researchers said.

Source: Healthcare Finance

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